States’ FY23 borrowings may be back-loaded

Thanks to the cushions of liberal interest-free capex loan from the Centre, higher tax devolution and release of GST compensation amounts, the Centre would expect rather back-loaded market borrowings by the states in the next fiscal year.

According to an official source, states’ governments are seen to borrow just 50% of their annual borrowing limit of 4% of GSDP in the first nine months of FY23, offsetting the impact on the market from the higher borrowings by the Centre.

The states may also see this informal arrangement palatable given the rising yields on the state development loans (SDLs), and the uncertainties surrounding liquidity withdrawals by the US Fed and other central banks.

After Covid pandemic hit states’ tax revenues, the Centre gave them the facility to borrow up to 75% of the annual threshold in FY22 in April-December. A similar relaxation was available in FY21 as well. This time around, such front-loading of borrowings by the states is not considered necessary.

“For the last two years, (resource) problem for states was more acute in the first halves because of the lockdown after Covid outbreak in 2020-21 and then the wave of Delta variant in 2021-22. Next year, it is likely that the fiscal stress of states will be less in the first half. But, we have not yet decided on how much borrowings to be permitted in April-December,” finance secretary TV Somanathan told FE.

On January 24, the weighted average cut-off of SDLs hardened by 14 basis points to a high 7.25% on from 7.11% in the last auction, Care Rating said. Bond yields had risen last week following the Union budget signalling higher than expected market borrowings — gross of Rs 14.95 lakh crore in FY23 compared with Rs 10.47 lakh crore in FY22 — by the Centre. The Centre will likely borrow around 60% of FY23BE in H1, similar to a pattern seen in recent years.

The FY23 borrowing window for states is seen to be in the region of Rs 9.8 lakh crore (compared with Rs 8.5 lakh crore for FY22), including about Rs 1.2 lakh crore earmarked for power sector reforms.

In her Budget speech last Tuesday, finance minister Nirmala Sitharaman announced that the states will be allowed a fiscal deficit of 4% of GSDP of which 0.5% will be tied to improving the power distribution firms’ corporate governance and lowering pilferage in power supply.

Even though Somanathan and revenue secretary Tarun Bajaj have ruled out any direct link between the Centre’s Rs 1 lakh crore interest free 50-year loan to states (nearly 0.5% of GSDP) and the cessation of the five-year GST shortfall compensation on June 30, they acknowledged that the fact that states would need support next year was behind the decision. The capex loans are over and above the normal borrowing ceiling approved for the states in FY23.

The move is seen at avoiding a sudden drop in the resource availability to the states, which received Rs 1.1 lakh crore under the special back-to-back loan facility in FY21 and Rs 1.59 lakh crore in FY22 to bridge the gap in GST compensation to states from designated cesses. States typically cut capex when they face a shortfall in resources, while mostly keeping up their revenue expenditure.

Besides GST compensation till June, the Union budget has pegged the tax devolution to the states at a robust Rs 8.16 lakh crore in the FY23BE, 9.6% higher than the `7.44 lakh crore in the FY22 revised estimate (which is 12% more than FY22BE).

“The loans for capex will reduce the states borrowing requirements,” said India Ratings chief economist DK Pant.

According to rating agency Icra, 29 state governments/UTs (except Odisha) have cumulatively borrowed Rs 5.46 lakh crore SDLs during April 1-January 24, 2022, 10.8% lower than the same period last year.