India needs to curb a borrowing spree by its state governments

WHICH Indian state sounds more likely to repay a loan: Bihar, the country’s poorest, with a budget deficit of nearly 6% of its state GDP last year and a hole in its finances after it banned alcohol sales; or Gujarat, a relatively prosperous coastal region with a deficit nearer to 2%? According to bond markets at least, both are equally good credits, and so pay the same interest rate. As welcome as such mispricing might be to the Bihari authorities, it is brewing trouble for the rest of the Indian economy.

The borrowing habits of Bihar, Gujarat, and India’s 27 other states used to be below the radar of all but the pointiest financial eggheads. The indebtedness of India, and its annual budget deficits—both high by emerging-market standards—could largely be blamed on the profligacy of the central government in Delhi. But an explosion in the net amounts borrowed by states over the past decade (see chart), from 154bn rupees in 2006 ($3.5bn then) to an estimated 3.9trn in the fiscal year…Continue reading

This post was originally published in the Economist.

Advertisements
India needs to curb a borrowing spree by its state governments

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s