Center steps up review of state borrowing
The Center will review each state’s off-budget commitments before approving its FY23 borrowing limit. rates started by the Reserve Bank of India, which could increase the cost of government borrowing.
As the Covid pandemic hit states’ tax revenues, the Center not only raised their borrowing limit by 2 percentage points to 5% of GDP in FY21, but also allowed them to borrow up to 75% of the annual threshold in April-December of the year. A similar easing was also available in FY22, while the limit was reduced to 4.5%. This time around, however, such forward borrowing by states will only be allowed under tighter control by the Center, according to official sources. The state borrowing limit for the current fiscal year is 4% (see chart).
To ensure that states do not borrow too much by downplaying the facts, the Union Finance Ministry has asked them to provide detailed information on various liabilities. “Information has been sought on off-budget borrowing, guarantees provided to public entities and whether contributions to the National Pension System (NPS) are deposited on time or not,” said a senior finance department official of a State. .
Separately, Finance Secretary TV Somanathan wrote to chief secretaries of all states in April that officers of the All India Service (such as those of the IAS) will be subject to disciplinary action under their service rules if they submit incorrect financial information to the Union Government, another state government official. mentioned. The trigger for the letter was that a state breached its borrowing limit by providing incorrect information to the Center in a recent year, the source said.
The Center has yet to give final approval for each state’s borrowing plan for the current fiscal year, whereas in recent years such approvals have been granted in April itself. It also signals its intention to monitor state borrowing more closely in the current year.
The Center also believes that given the increased strength in revenues, fiscal pressure on states will be relatively less in the first half of the current fiscal year, allowing many to slow down their borrowing.
The Centre’s own gross borrowings from the market in the current fiscal year are pegged at Rs 4.95 trillion, down from Rs 10.47 trillion in FY22. It announced that 60% of borrowings will be made in the first semester.
Over the past two years, a relatively low interest rate regime, instituted by the RBI, has helped the Center and the States to contain the cost of borrowing. Yet the central and state debt burden has increased over the past two years due to the sharp increase in borrowing. Revenue constraints, Covid-induced extra spending on welfare, and the Centre’s high capital expenditure necessitated higher budget deficits and therefore high borrowing.
General government debt hit a 38-year high of about 89.4% of gross domestic product in FY21, with Central debt at 59% and overall state debt at 30.4% . A committee, which reviewed the parameters of fiscal responsibility, had said that general public debt should be contained at 60%, with a ceiling of 40% for the Center and 20% for the States.
States cannot borrow beyond the annual limits set by the central government under Section 293(3) of the Constitution. But the States do not need the prior agreement of the Center to guarantee the loans and advances and the bonds issued by its entities. All of this has also led to a greater reliance on off-balance sheet borrowing by some states.
According to Crisil Ratings, all states’ off-balance sheet borrowing may have peaked at around 4.5% of GDP, or around Rs 7.9 trillion, in FY22. up about 100 basis points from FY20, the Crisil study found of 11 states that account for about 75% of the country’s aggregate GDP. About 4 to 5 percent of state revenues will go to service those guarantee bonds this fiscal year, partially reducing the ability of state governments to fund capital expenditures, he said.
The second state government official quoted above said that the Center takes into account the nominal GSDP projected by the Fifteenth Finance Committee when deciding on the borrowing limit for each state. As a result, the overall FY23 untied borrowing window for states is considered to be in the range of $8.3 trillion, while another borrowing of approximately $1.2 trillion is tied. power sector reforms.
Market borrowing by states could be relatively weak in the first few months of this financial year, thanks to cushions from a 1 trillion rupees interest-free liberal investment loan from the Center, likely higher fiscal decentralization than expected and the release of GST compensation amounts until June 30.
After the RBI’s surprise hike in the repo rate by 40 basis points on Wednesday, the yield on 10-year central government securities (G-secs) closed at 7.38% on the day, a three-year high. Analysts expect the benchmark yield to reach 8-8.5% soon. State Development Loans (SDLs) would typically be 50 basis points more expensive than G-secs, although this varies widely by state.
Even before the RBI’s rate action, SDL yields were hardening. On March 29, the SDL weighted average threshold tightened by 18 basis points to a high of 7.34% from 7.16% in the previous auction. On April 26, Punjab borrowed at 7.48% for the 20-year SDL while Andhra Pradesh raised at 7.52% for the 20-year SDL.