NEW DELHI: The state governments’ market borrowings, which is the chief source of funding of their gross fiscal deficits, have risen sharply so far during the current financial year as they struggle to tackle the COVID-19 led financial constraints.
Cumulatively, the states have raised Rs 1.67 lakh crore via market borrowings during April-June period, which is double the borrowings (Rs 0.82 lakh crore) in the corresponding period from a year ago, shows a Care Ratings analysis.
State-wise, the borrowings of Tamil Nadu have been the highest so far in 2020-21, with the state raising Rs 28,000 crore from the Reserve Bank of India (RBI) through the auction of state government securities or state development loans (SDLs) with tenure of 10 years and cut off yield of 6.55 per cent. This was followed by states including Maharashtra, Rajasthan, Andhra Pradesh, Telangana, Kerala and West Bengal.
In June alone, seven states raised a total of Rs 12,000 crore through SDLs, which was Rs 3,000 crore more than the notified amount with five states exercising the green shoe option.
Overall, the top 10 borrowing states together accounted for 86 per cent of the total market borrowing of states so far this fiscal, as per the analysis.
On account of the COVID-19 crisis, the state finances continue to be under stress. During the July-September period, the RBI expects the state governments borrowing to be higher at Rs 1.78 lakh crore.
According to the central bank's latest notification, the state governments quantum of borrowing would be at Rs 54,853 crore in various tranches in July. The total market borrowing is likely to be around Rs. 56,362.65 crore in August, followed by another Rs. 67,060.35 crore in September.
States like Andhra Pradesh, Assam, Bihar, Uttar Pradesh, Telangana, Rajasthan, Maharashtra, Gujarat, Karnataka, Punjab, Goa, Haryana, Tamil Nadu and Uttarakhand among others will be participating.
Meanwhile, there has been a notable decline in the cost of market borrowings for state governments since the start of the fiscal year. The weighted average yield of fresh state government borrowings has fallen by 177 bps since the first auctions of the current fiscal year (April) and by 45 bps since mid-June 20.
“The sharp decline has narrowed the gap between central and state government primary market yields,” pointed out Kavita Chacko, senior economist, Care Ratings.
The spread between central government and state government primary market issuances has narrowed to 17 bps in June from 121 bps in April. On comparing the movement of yields of the 10-year SDLs (which has the highest share in total issuances at 44%) issued by the states that have held auctions during April-June, it was seen that Maharashtra and Gujarat have the lowest yields at 6.54 per cent, while Telangana and Andhra Pradesh have relatively higher yield at 6.6 per cent and 6.57 per cent, respectively.
States, in all likelihood, would face significant slippages from the current financial year, with the extent of slippage varying depending on the pace at which economic activity limps back to normalcy.
Economists have pegged the aggregate fiscal deficit of India’s states to rise by up to 4.5 per cent of GDP in the current fiscal at Rs 8.5 lakh crore. Earlier, rating agencies ICRA and India Ratings had also estimated the gross market borrowings of the states to touch Rs 7.8 lakh crore and Rs 8.25 lakh crore in the current fiscal, respectively. In FY20, the total state borrowing stood at Rs 6.4 lakh crore.