India Deficit to Rise as States Take On Power Companies' Debt

  • Combined federal and state deficit may rise over 100 bps
  • Number will be lower if fewer states opt for debt revamp

Asia’s widest budget deficit is set to increase as India’s government implements a plan to clear debts piling up at power distribution companies.

The combined federal and state shortfall stands to widen by more than one percentage point to 8.5 percent of gross domestic product in the year through March 2016, a government official briefed reporters in New Delhi, asking not to be identified citing rules. However, the number could be lower if fewer states opt for the plan.

Prime Minister Narendra Modi’s administration last month unveiled a plan to reorganize about 5 trillion rupees ($75 billion) of debt at power companies, as he looks to turn them profitable in three years. This involves state governments, which own the utilities, acquiring 75 percent of the debt over two years while the companies will repay the rest by selling bonds.

So far, only 11 of India’s 29 states have signed up for the plan. These include Rajasthan and Uttar Pradesh, which have two of the four most indebted power retailers.

The restructuring may "theoretically" increase the states’ fiscal deficit to 4.57 percent of their GDP next year against an estimate of 2.76 percent, and leave them with little room for capital expenditure, the official said.

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