Why states may use up all of extra borrowing space

So, the unconditional extra borrowing window is effectively 1% of GDP now, and for the balance 1%, there is still a rush.

More states are queuing up to make use of the riders-linked part of the extra borrowing space allowed for FY21, increasing the chances of all states together nearly exhausting the enhanced net borrowing limit of 5% of GDP in the year.

The Centre on Friday granted permission to Uttar Pradesh and Andhra Pradesh to raise Rs 4,851 crore and Rs 2,525 crore, respectively, in additional market borrowings, for meeting reforms related to the one-nation, one-ration-card system and ease of doing business, in that order.

On September 24, the Centre had permitted five states, including Andhra Pradesh, to raise a total of Rs 9,913 crore for implementing the one-nation, one-ration-card system, one of the four reform conditions attached to the additional borrowing window. So, permission has so far been granted to raise Rs 17,289 crore to states under the conditions-linked part of the extra borrowing window. Telangana, Goa, Karnataka and Tripura earlier carried out one-nation, one-ration-card system and secured the borrowing leeway.

These apart, the Centre had earlier said some 21 states had agreed to avail of the option 1 of borrowing under a special low-cost RBI window to make good their GST shortfall (Rs 97,000 crore for all states) sans the part that resulted from the pandemic.

The Centre, in view of the Covid-19 pandemic, had in May allowed additional borrowing limit of up to Rs 4.28 lakh crore (2% of GSDP) to states for FY21. While 0.5 pecentage point (pp) of the extra borrowing window (Rs 1.07 lakh crore) is available to all states unconditionally, 1 pps was to be made available in four equal tranches with each to “clearly specified, measurable and feasible reform actions”.

The balance 0.5 pp was to be accessed by states, subject to their ‘completely achieving’ the milestones in at least three out of four reform areas. Later, an offer was made by the Centre at the GST Council, whereby the Option 1 came with the incentive of (additional) 0.5 pp unconditional FRBM relaxation for states. So, the unconditional extra borrowing window is effectively 1% of GDP now, and for the balance 1%, there is still a rush.

There is actually little room for the government to raise the consolidated government borrowing level. Given an acute revenue shortfall, the Centre itself had announced a sharp 54% increase in its FY21 gross borrowing target to Rs 12 lakh crore from Rs 7.8 lakh crore planned initially; it chose to not alter the plan during the H1 borrowing plan announced earlier this week, even as it is contemplating another dose of fiscal stimulus. It is keen on reducing the extra budgetary cost of the stimulus by rejigging the expenditure.

Justifying the plan to push the states to borrow for the GST shortfall, the Union finance ministry has argued that “while additional borrowing by the Centre influences the yields on central government securities (G-secs) and has other macro-economic repercussions, the yields on state securities do not directly influence other yields and do not have the same repercussions”.

Icra wrote in a note earlier this week: “The net state development loan (SDL) issuance rose by 91.4% in H1FY21 to Rs 3.03 lakh crore from Rs 1.58 lakh crore in H1FY20.”

RBI has already released the indicative calendar of market borrowings by states/UTs for Q3FY21 as per which they may raise Rs 2.02 lakh crore in the quarter via SDL, up a quarter over the year ago period. “In our view, the actual borrowings in Q3FY21 could appreciably overshoot the indicative amount, especially given the absence of participation indicated for West Bengal in Q3FY21,” Icra said. It added: “the minimum net borrowing of the state governments for FY2021 would be 4.77% of gross domestic product (GDP)/gross state domestic product (GSDP).”

A review of the Budgets of 10 states by FE showed their combined expenditure in April-July grew 7% on year, compared with a rise of just 3% in the year-ago period. However, their capital expenditure declined 19% year-on-year in the first four months of this fiscal. These states’ tax revenue slipped 21% on year during the first four months of the current fiscal.

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