Covid-19 impact: State govts likely to raise more money using bonds

With the central government jacking up the size of its market borrowings for FY21, state governments, too, are expected to raise more money, via development bonds. This is to fund expenditure as revenues dry up because of the severe economic downturn triggered by the nationwide lockdown to contain the spread of Covid-19.
 

Madan Sabnavis, chief economist, CARE Ratings, said revenues will be under severe pressure in FY21, yet states will have to pay salaries, pensions, service old debts, and spend on establishments. Some money like GST arrears will come from the Centre. Against this backdrop, the borrowings by state governments may go up, he said.
 

According to the Reserve Bank of India (RBI) data, state governments' gross market borrowings stood at Rs 6.08 trillion in 2019-20, up from Rs 4.78 trillion in 2018-19.

About the Government of India’s borrowing, the RBI in a statement said the estimated gross market borrowing in FY21 will be Rs 12 trillion, as against Rs 7.8 trillion (BE 2020-21). The above revision in borrowings has been necessitated in view of the pandemic and its economic impact.

There is also the issue of the limit of state government borrowings (3 per cent of gross domestic product, or GDP). This will have to be addressed to facilitate borrowings in the current circumstances.

D K Joshi, chief economist, CRISIL said: “You can’t apply fiscal rules, which are relevant for normal times. Borrowings are a necessity for fiscal expansion. You can’t monetise everything."
 

State governments have been hit hard as far as revenues are concerned. Market borrowings will go up to fund the expenditure, Joshi said.

Aditi Nayar, principal economist, ICRA, said if the market borrowing limit is not enhanced, a substantial expenditure compression will have to be undertaken, which may be counterproductive for an economic recovery. States will have to largely manage within the fiscal constraints.
 

According to rating agency ICRA’s assessment of the government borrowing in April 2020, the gross SDL issuance is likely to rise nearly 19-23 per cent to Rs 7.6-7.8 trillion in FY21, from Rs 6.3 trillion in FY20. This factors in GDP growth in FY21 and the likely revenue and expenditure impact of the Covid-19 pandemic. Market participants/subscribers of SDLs may continue to demand higher yields in Q1FY21.