Indian states borrowing much lower in 2021

An update on how the states of India are doing on revenues front and borrowings

 Indian states borrowing much lower in 2021

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• The story: State governments of India are borrowing less from the market, aiming for fiscal prudence as suggested by the Finance Commission, even as Covid-related economic dislocations squeeze their existing revenue streams.
• The data: Market borrowings by states thus far in financial year 2021-22 (FY22) is 11 per cent lesser than last year. In fact, it is 12 per cent lower even than what they had planned to borrow according to their calendar for this year. This shows extreme fiscal prudence.

1. 25 states and one Union territory (UT) have raised a cumulative Rs 2.92 trillion, as against Rs 3.27 trillion borrowed by 27 states and two UTs in the comparable period last fiscal.
2. States have been less inclined to raise longer-term funds via market borrowings and add to their liabilities after having borrowed heavily in FY21 (around Rs 8 trillion). This is with an eye on fiscal consolidation and for maintaining their fiscal deficit within the target set by the Finance Commission.
3. The Finance Commission has set a fiscal deficit target of 4 per cent of a state’s gross state domestic product (GSDP) for FY22.
4. Instead of borrowing from the markets, states are meeting their revenue shortfalls by tapping short-term borrowings through special drawing facility (SDF) and ways and means advances (WMA), both provided by the Reserve Bank of India (RBI). State development loans (SDL), or bonds issued by states, are of much longer tenure.

• Things eased a bit: The WMA borrowings of states between April 9 and July 9 was higher by 35 per cent at Rs 0.92 trillion, but it moderated by mid-July and in August as the Centre paid Rs 0.75 trillion to the states towards goods and services tax (GST) compensation shortfall. The easing of lockdown restrictions also helped states mobilise more revenue.

1. In the first two weeks of September, WMA borrowings have risen again, with states tapping into Rs 22,810 crore from the RBI. Still, states are enjoying relatively lower rates in their SDL borrowings.
2. Eight states raised Rs 8,910 crore at a three-week-low borrowing cost. Rating agency ICRA noted the borrowing was 91 per cent higher than the initial guidance of Rs 4,700 crore, but still 37.7 per cent lower than the year-ago level of Rs 14,300 crore for the week.

• Cost of borrowing: The weighted average cost of borrowings for the states was at 6.80 per cent, which was 7 basis points (bps) lower than a week ago, CARE estimated. The spread between the 10 -year SDLs and equivalent maturity government security (G-sec) also narrowed to 60 bps from 70 bps a week ago, the lowest since the first week of April 2021.

1. This is because the G-sec rates also softened significantly after the RBI announced that it would simultaneously buy and sell Rs 15,000 crore of government bonds In these auctions, the RBI purchases longer tenor bonds and sells shorter tenor ones to bring down the rates in the longer tenor.
2. The 10-year G-sec yield softened by 8 bps to 6.12 per cent on Tuesday from 6.20 per cent a week ago. Foreign investors are also taking an interest in G-secs and SDLs, amid the moderation in inflation readings, huge liquidity surplus, and expectations of the continuation of the accommodative monetary policy stance by the RBI.

• Summary: The Indian states are struggling fiscally as their ability to raise taxes is severely curtailed due to the GST regime. The pandemic was a further brake on their revenues. Delays in compensation payment made things worse.
• EXAM QUESTIONS: (1) Explain the various gaps in revenues that states of India have faced in recent years. (2) What are the ways

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