Huge spike in states' Q4 spend to be used mostly to settle current bills

Aggregate debt raised from the market by states has risen in nine months of this year by a massive 43.5% over last year. It is the biggest jump in state borrowings ever

States will be writing out more cheques in the last quarter of this financial year, giving a most sought-after bump up to government spending. Quite a bit of it is unplanned in a year when states have had to turn to markets instead of being able to depend on the Centre. 

Data on their borrowing and the headroom they have built up shows this trend clearly. Of the three months of the third quarter, states have borrowed less from the markets in both, November and December. During these two months, states have borrowed Rs 1.28 trillion while they could have borrowed Rs 1.36 trillion, or six per cent more. 

In a year when every rupee counts, it could show the emergence of breathing space in the state finances after two quarters of penury. An analysis by ratings agency Icra also shows the share of shorter-tenure papers or those below 10 years in the bucket of total issuance has declined from 43.7 per cent in the first quarter of FY21 to 18.9 per cent the third quarter. It means the states are able to raise loans that will mature over a longer time horizon and are not paying too high a cost for it to the banks and insurance companies buying those papers. 

Remember, this does not show that the states are borrowing less. Far from it. The aggregate debt raised from the market by the states has risen in nine months of this year by a massive 43.5 per cent over last year. It is the biggest jump in state borrowings, ever. They have raised Rs 5.6 trillion from the Rs 3.9 trillion in FY20.

Splice the data any which way, the softer borrowings and the trends in conservative expenditure management show states are going to spend more in the January-to-March quarter. 

For instance, just look at the table of expenditure trend of key states till November. Of particular interest in this table for the nine states whose data is up to date, is the trend in their revenue expenditure minus interest, wages, pension and subsidies. This is a head where the states had the option to delay the bills to next year. Some of those are for power, others for office expenses and so on. 

Trends from the first half of the year shows the states did keep the bills pending initially. Yet, these have now jumped up going past even last years levels in states like Andhra Pradesh and Rajasthan. For all the nine states the levels are about the half way stage from their budget estimates. If they keep on meeting these remaining bills, it would turn out to be a pretty additional spending of close to Rs 2.5 trillion in the last quarter for all the states combined. 

While the states are following the trend set by the Centre and just sticking to their budget commitment, it is evident that they have not been able to manage their receipts and expenditures. It is not surprising. State treasuries are grappling with the huge level of asymmetric fund flows they have been swamped with instead of orderly release from the Centre to which they are accustomed. 

For instance in the auction of December 29, as many as seven states landed up to borrow Rs 6,800 crore—Kerala, Meghalaya, Puducherry, Punjab, Rajasthan, Tripura and West Bengal—“even though they had not originally indicated that they would participate in this auction”, the Icra paper noted. On the other hand, Gujarat and Maharashtra both had informed RBI they would raise Rs 2,000 crore each, but both did not turn up.

Devendra Pant, chief economist India Ratings, however, was unwilling to paint this level of spend as a stimulus for the economy. “If they could have spent more from their own resources like tax or non-tax revenue, that to me would have constituted a stimulus. This one doesn’t.” he said. He has a point. 

Despite the gyrations, it is clear that none of the states shall exceed the budget estimates set at the beginning of the year. But they shall also not fall short, which does seem a big achievement compared to the first quarter of the year when even this had looked difficult. So the expenditure, as Pant points out shall not qualify as a stimulus and which the economy needs badly. Yet by bunching the expenditure to the last quarter of the year, the states could give a leg up to the overall spending in the economy under the head public administration. Taking a different tack from Pant, Sabyasachi Kar, RBI chair professor at NIPFP said he wasn't sure the states have the capacity to spend so rapidly at the end of the year. "Their absorptive capacity is limited even for revenue spending".  

One of the reasons the states are more relaxed are the two windows the Centre has opened for them. One of them is the the permission for additional borrowing permission equivalent to 0.5 per cent of Gross States Domestic Product to each state. It works out to Rs 1.06 trillion under this provision. Another Rs 1.10 trillion is through the special borrowing window set up in October 2020 from which they have already got Rs 54,000 crore. Both of them have begun to impact state finances favourably as the level of money received by them has gone up. The distance between their receipts from the budget estimate look more comparable with the trends of last year. 

In the process the states are also cutting back on capital expenditure to make space to run their revenue spend through. As the table again shows, except for Andhra Pradesh and Karnataka (through a one-time build up) the pace of capital expenditure has fallen away in all the states. Particularly worse off are Uttar Pradesh and Punjab which have hardly reached double digit rates of spend in their capital budget. 

1. Thirteen states and one Union Territory (UT) raised Rs. 18,900 crore through state development loans (SDLs) in the auction held on December 29, 2020, the last such of Q3 FY21. The sum is nearly 44% higher than the amount that had initially been indicated for this week and twice as high as the year-ago level.

2. Overall, in Q3 FY2021, the gross SDL issuance stood at Rs. 2.02 trillion which means the aggregate has remained within the market borrowing calendar of states released by the Reserve Bank of India. In terms of the month wise trend, SDL issuance was higher than indicated in October 2020. Subsequently, the actual SDL issuance in November 2020 was 4.3% lower. Similarly it was 6.9% lower in December 2020. 

April to November FY21	Total Revenue		Total Expenditure		Revenue exp less interest, wages & pension		Capital expenditure
	Current	COPPY	Current	COPPY	Current	COPPY	Current	COPPY
AP	41.19	35.68	66.67	44.01	69.09	49.25	52.04	14.67
MP	59.27	50.67	53.96	52.47	48.48	47.71	49.61	55.16
Karnataka	50.54	62.14	60.21	48.77	52.50	48.40	755.94**	42.25
TN	44.86	57.12	47.60	56.60	49.48	60.08	34.74	35.55
UP	34.92	46.96	36.85	47.09	35.75	41.79	11.23	35.87
Punjab*	40.60	38.60	40.86	33.30	44.30	40.48	8.75	4.99
Rajasthan	44.07	54.47	54.60	53.73	57.28	53.90	31.56	52.04
Chhattisgarh	41.95	49.43	47.10	53.89	50.61	56.72	27.20	36.00
Odisha	48.59	57.31	43.55	54.73	40.51	58.02	26.65	36.47

*October; ** one-off; COPPY=comparable period of previous year; Source: CAG monthly accounts