States may borrow only around 65% of Jan-Mar calendar, sources say

Informist, Wednesday, Jan 11, 2023


–Govt sources: States have ample cash, spending still sluggish

–Jan-Mar state borrow not seen pushing up gilt yields


By Aaryan Khanna


NEW DELHI – The Centre expects the states to borrow only around two-thirds of the 3.41 trln rupees that they intend to borrow in the last quarter of the current financial year ending Mar 31, two officials in the finance ministry told Informist. This will be well below the 3.41-trln-rupee figure that had spooked investors.


"We are not seeing states taking on debt, they cannot spend such a massive amount in a single quarter," one of the officials said. "The borrowing should only be similar to what they have done so far (in Apr-Dec), around 65% of the calendar."


In the first nine months of the current financial year, states have raised only 69.8% of their indicated borrowing of 6.55 trln rupees for these nine months. At the same run rate, the market will have to absorb only 2.38 trln rupees worth of state bonds in the last quarter of this financial year. This will slip to 2.22 trln rupees if states borrow only 65% of the amount indicated for Jan-Mar.


States are flush with ample cash and spending remains sluggish, so they would not need to borrow the entire amount, the official said. In a note on Tuesday, IDFC FIRST Bank estimated state governments have a cash surplus of around 3 trln rupees in December.


States’ revenues in the current fiscal have been bolstered by a sharp increase in taxes. Tax devolution to states by the Centre in Apr-Dec was 5.51 trln rupees, up 36.8% from the corresponding period of the previous year.


States’ revenues have also been bolstered by the Centre’s interest-free loan for capital expenditure which is in excess of 1 trln rupees. This rise in state incomes would have fuelled a massive capital expenditure push if the states had spent this extra money.


However, the Centre has released only 411 bln rupees to states for capex under the special assistance scheme until December. This amounts to about 40% of the total outlay for the scheme, indicating a slow uptake in states' spending in the current fiscal. In October, ICRA had estimated some states could expand their capital expenditure by as much as 81% on year in 2022-23.


With such a large surplus of cash, the states may not need to borrow the full 3.41 trln rupees that they have tentatively budgeted to borrow in the last quarter. Even in the unlikely event that the states do borrow the full amount tentatively budgeted, the finance ministry officials do not see any significant impact on gilt yields. In January, after the states’ borrowing calendar for the last quarter was announced, the yield on the central government benchmark 10-year bond had spiked to 7.36%, its highest level in over seven weeks.


The central government Oct-Mar gilt auction calendar takes into account a higher borrowing by the states. The central government’s weekly gilt auctions end on Feb 24 to make room for states to borrow in March if required, the officials said.


Bank treasury officials had expected states to borrow 3.0-3.2 trln rupees in Jan-Mar, after borrowing only 3.5 trln cumulatively in the last two quarters.


In the previous fiscal, states had borrowed 21.7% less than the tentatively budgeted amount. If the states were to do the same this year in percentage terms, it would mean a 3.22 trln rupee borrowing in Jan-Mar, still lower than the 3.41 trln rupees announced in the calendar for states’ borrowing. States will have to borrow 2.44 trln rupees in the current quarter to match their bond issuances in 2021-22.


"To an extent, it's better for states to be borrowing now," the official said. "If states change their borrowing pattern and face a cash shortfall in Apr-Sep (of the next financial year), then the (Centre's) market borrowing calendar may get disrupted."


When planning their borrowing for the quarter, states prefer to give themselves leeway up to the cap in market borrowing imposed by the Centre and tend not to gauge the negative market impact, the second official said.


States are allowed to borrow up to 3.5% of their gross state domestic product in 2022-23. Some states announce a high borrowing near the cap to show only a gradual year-on-year increase, at pace with their economic growth, even if the actual borrowing is low, the official said.  End


Edited by Akul Nishant Akhoury


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