Borrowing brakes eased for highly indebted states

The Center has moved to lift a virtual freeze on fresh market borrowing by states with large off-budget debt. However, it will remove at least 25 basis points (bps) from the base net borrowing (NBC) cap of 3.5% of the states’ gross domestic product (GSDP) in those states in FY23.

Off-budget commitments will only be counted from FY22. The estimated debt balance will be brought back above the line over the three years to FY26 in equal installments.

In an earlier directive to the states, the Center had stated that all of their FY21 and 22 off-budget commitments would be adjusted against the NBC for FY23. If implemented, this policy would have severely restricted the plans of some states like Telangana, Punjab and Kerala to raise funds through State Development Loans (SDLs) in the current fiscal year and hence their capital expenditures. The Center’s position has already caused some delay in approvals of annual state SDL limits, which are typically in place by April of any fiscal year.

The Center’s tightening of government borrowing regulations takes into account rising yields on SDLs and the rate hike cycle started by the Reserve Bank of India, which could raise the cost of government borrowing.

The high cost of public borrowing could further inflate public debt, already at a precarious level.

In a letter to state finance ministries on March 31, 2022, the Union Finance Ministry wrote:

“Borrowings by state public sector corporations/corporations, special purpose entities and other equivalent instruments, the principal and/or interest of which are to be financed from state budgets and/or the attribution of taxes/taxes or any other income of the State, shall be considered as borrowings made by the State itself for the purpose of issuing the consent under Article 293 (3) of the Constitution of India.

According to Crisil Ratings, all states’ off-balance sheet borrowing may have peaked at around 4.5% of gross domestic product (GDP), or about 7.9 trillion rupees, in FY22.

As the Covid pandemic hit state tax revenue, the Center not only raised its borrowing limit by 2 percentage points to 5% of GDP in FY21, but also allowed it to borrow up to 75% of the annual threshold in April-December of the year. A similar easing was also available in FY22, when the limit was reduced to 4.5%.

Sensing that the states might reduce their capital expenditure, the Center released the goods and services tax offset of around Rs 86,912 crore to the states on May 31, including arrears and aid from April- may. The Center had to dip into its own revenue pool to raise Rs 62,000 crore for this purpose.

Analysts have said delays in market borrowing will prove more costly for states as the Reserve Bank of India (RBI) is likely to raise interest rates further in the coming months.

No less than nine states – Assam, Chhattisgarh, Himachal Pradesh, Madhya Pradesh, Nagaland, Sikkim, Telangana, Uttar Pradesh and Uttarakhand – which initially indicated they would borrow in fiscal year 23 from April to May, did not do not yet have access to the SDL market. These states may still be awaiting Center approval, ratings agency Icra said. Although they indicated that they will participate in the SDL auction held on May 31, Punjab (with a borrowing plan of Rs 1,500 crore) and Telengana (Rs 3,000 crore) did not participate.

Telangana, which blamed the Center for not allowing it to borrow, finally got an ad hoc green light on June 3 to borrow Rs 4,000 crore from the market. The government borrowing plan for the full year has not yet been approved by the Center.

“We estimate that fiscal decentralization to the states will be Rs 1.1 trillion higher than budget estimates for FY23. above the amount transferred in April 2022. This would ease cash flow for states, especially those that may not have received their borrowing authority by mid-May. An early release will help accelerate spending, while a later release can only lead to lower borrowing in the fourth quarter, which will not serve to accelerate the recovery of economic activity,” the economist said. in chief of Icra, Aditi Nayar.

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