Borrowings by states double in lockdown owing to severe revenue crunch

The governments — state and union territories — have had to increasingly resort to borrowings to meet funding exigencies | Illustration: Binay Sinha
With a severe dip in revenues during the lockdown, market borrowings by state governments doubled to over Rs 1.26 trillion from April to early June (Rs 60,000 crore in the same period last year).

The governments — state and union territories — have had to increasingly resort to borrowings to meet funding exigencies, owing to severe revenue shortfall caused by the shutdown, said CARE Ratings.

Both Central and state governments have seen a notable increase in market borrowings since the start of FY21.

However, the cost of borrowings (higher yields) has been contained due to the sharp cut in policy repo rate (115 bps) since end-March, and injection of liquidity into the system by the RBI.

So far in FY21, said CARE Ratings, 22 states and 1 UT have cumulatively raised Rs 1.26 trillion by way of issuance of state government securities or state development loans (SDLs) through weekly auctions — with tenures ranging from 1.5-20 years. The 10-year securities accounted for the highest share of SDL issuances (46 per cent).

Among states, market borrowings by Tamil Nadu have been the highest in FY21, followed by Maharashtra, Andhra Pradesh, Kerala, Rajasthan, and Haryana. These six accounted for 60 per cent of the total market borrowings by states, it said.
Borrowings by north-eastern states Arunachal Pradesh, Manipur, Nagaland, as well as Sikkim have been among the lowest, accounting for 1.2 per cent of the total.

Referring to the cost of funds, CARE said that despite the increase in market borrowings and concerns over the same, yields on government securities have been relatively contained. This could be attributed primarily to the RBI’s sizeable rate cuts since March.

The persistent liquidity surplus in the banking system (over Rs 4 trillion) that has prompted banks to buy government securities, along with the RBI’s steps to ease financial stress on the government, have also kept yields low.

The weighted-average yield of borrowings of the Centre declined by 35 bps in May from April. The yield on state government borrowings fell 109 bps during the same period. This effectively narrowed the gap between Central and state government primary market yields (weighted-average) to 47 bps in May, from 121 bps in April.

The RBI’s rate cut action has had a greater impact on state government securities. It has cut the policy repo rate by 115 bps since late March (by 75 bps on March 27, and 40 bps on May 22). However, there has been a 163-bp decline in the weighted-average yield of state government securities.

Policy measures of the RBI, such as increased limit of Ways and Means Advances (WMA), may also have caused a fall in yields of state government securities. States have, however, not resorted to using WMA in FY21 so far, with the peak outstanding balance at Rs 6,752 crore as of May 22, it added.

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