The data on state borrowings indicate that the reality could be more nuanced and reveal a number of interesting but distinct trends (see table).
illustration: Binay Sinha
First, contrary to the expectation that states with higher number of Covid-19 positive cases would borrow more, the correlation between the number of Covid-19 cases and borrowing turns out to be moderate and close to 45 per cent. However, there are two outliers in the data: (a) the largest borrower, Uttar Pradesh, does not have the highest number of Covid-19 cases; and (b) Maharashtra, with the highest number of Covid-19 cases, borrowed only half the amount borrowed by Uttar Pradesh. In fact, if we get rid of these two outliers, then the correlation between the number of Covid-19 cases and the amount of borrowing jumps to 72 per cent.
Second, a few states were in a hurry to raise funds the moment the lockdown was announced. For example, Uttar Pradesh made almost 96 per cent of the borrowings in March itself.
Similarly, West Bengal raised Rs 9,000 crore in March — 100 per cent of its borrowings during this period. These states had to pay a price for immediacy. The average yield of borrowing by these two states is 100 basis points higher than the borrowing yield of Tamil Nadu. This could be indicative of poor market timing and a lack of strategy in market borrowing on the part of some of the states.
Third, while some states were very innovative in borrowing at the long end of the yield curve, most of the states borrowed at the medium end. For example, in June, Tamil Nadu and Rajasthan borrowed Rs 2,000 crore and Rs 500 crore, respectively with 30-year bonds at an average annual yield of 6.7 per cent, which is just 14-15 basis points higher than the 30-year Government of India bond yield.
The trajectory of Covid-19 in India is marked by some degree of uncertainty. In fact, India is adding about 100,000 Covid-19 positive cases in less than a week. Therefore, the states with higher patient count would continue to spend its already-dwindling revenue on health care. There is another factor that puts pressure on state coffers — the cost of migrant labour. Uttar Pradesh, with the highest number of returning migrants, is expected to face sustained increase in expenditure to feed the jobless returnees. West Bengal, too, faces a similar scenario. While the states struggle to manage mounting expenditure, the prospect of revenue generation remains less than bright. In a situation when citizens are avoiding spending on non-essential goods and services, any increase in state revenue from GST (SGST) is remote in near future. Thus, as the dependence of states on market borrowing is going to continue for some more time, it is important that the states time the market well while borrowing to minimise the borrowing costs.
However, underneath these current trends of the state government borrowing, are some deeper issues. One, state government securities market lacks the dynamism of the central government securities. State government securities are primarily held by provident funds and insurance companies and since these securities lack an active secondary market, their stocks are mostly held to maturity. Open market operation with these securities are also non-existent.
Moreover, states are seldom distinguished on the basis of their fiscal conditions and associated credit ratings. The chairman of the Fifteenth Finance Commission, in a recent statement, pointed out that returning to a sustainable debt trajectory could be challenging in the medium term with both the Centre and the states substantially increasing their borrowing limits in the face of the Covid-19 pandemic. Thus, it is all the more necessary to be prudent and innovative in government borrowing programmes.
The writers are professors at the Indian Institute of Management Calcutta.