The ongoing second wave and rising Covid cases in some states have resulted in localised lockdowns which affected the revenues of states. This has resulted in curtailing state governments non-essential or developmental expenditure.By Manish M Suvarna
The quantum of funds raised by the states through state development loans (SDL) so far in the current financial year — till the latest auction held on August 24 — was lower by 15% against the amount indicated in the borrowing calendar, due to lower expenditure undertaken by states and release of goods and services tax compensation by the central government.
The SDL issuance also saw a 12% decline on year during the period.
As many as 23 states and one Union Territory have raised Rs 2.38 lakh crore in the above period via SDL, as against Rs 2.80 lakh crore shown in the calendar.
In FY22, states like Karnataka, Himachal Pradesh, Jharkhand, Odisha, and Tripura have not yet tapped the market to raise funds. Telangana, Andhra Pradesh, Jammu & Kashmir, Tamil Nadu, Haryana, Rajasthan, Manipur, and Nagaland raised more than the indicative calendar.
The ongoing second wave and rising Covid cases in some states have resulted in localised lockdowns which affected the revenues of states. This has resulted in curtailing state governments non-essential or developmental expenditure.
The release of GST compensation by the central government has come as a relief, which also allowed states to prune their borrowing through SDLs and ways and means advances (WMA). On July 15, the central government had given Rs 75,000 crore to states to make up for the shortfall in their revenues of the GST implementation.
The reason for the fall in borrowings is that most states are actively borrowing funds via WMA and special drawing facility,” said Ajay Manglunia, Managing Director & Head Institutional Fixed Income at JM Financial.
Since the start of this financial year, many states have preferred to meet their revenue shortfalls by tapping into the financial accommodation being provided by the Reserve Bank of India such as the short-term borrowing through SDF (special drawing facility) and WMA in place of long-term borrowings through the issue of SDLs, CARE ratings report said.
In July, the WMA borrowings by states has moderated after the release of GST compensation, easing of the lockdowns and resumption of business activity across states that could have led to improved revenue inflows. Soon after that in the first two weeks of August, it increased again said market participants.
WMA are short-term loan facilities provided by the central bank to the centre and state governments to borrow funds for filling the temporary mismatch between expenditure and receipts. Market participants said that the borrowing by states was also lower because the demand from the investors was less in the market that is resulting in rising yields on government securities.
The borrowing costs for states have gone below 7% for SDLs maturing in 10-year due to lower borrowings by the states. “The lower amount offered by the states cooled off borrowing cost a little bit. At a time it was higher than 7% and now it is lower than 7%,” Manglunia said.
Currently, the weighted average cost of borrowings across states and tenures were at 6.89%, a 5 basis point higher than a week ago. The increase in borrowing cost was due to rising yields on G-Sec as the market is concerned over the normalisation of monetary policy by the RBI and worries over the paring down of bond purchases by the US Federal Reserves, which could prompt an outflow of funds from the Indian markets. Dealers with state-owned banks expect that the lower borrowing will be raised in the second half by the states.
