States go slow on projects, halve borrowing even as Covid wreaks havoc

The reason could lie in RBI's accommodation to them and the fact that states themselves could be burdened with interest cost

States are going slow on fundraising from the market at a time when the second wave of the Covid-19 pandemic has turned out to be far more disastrous than the first wave. Ratings agency Care Ratings has said the aggregate state government borrowing so far this fiscal year has been 54 per cent less than the corresponding borrowings last year. “Only 12 states and one Union Territory (UT) have raised a total of Rs 37,200 crore so far in FY22, as opposed to the 22 states and one UT that raised Rs 81,005 crore in the comparable period of FY21,” it said. 

According to the borrowing calendar, 23 states and 1 UT were to raise Rs 81,900 crore in this period, but the fundraising is barely 45 per cent of the amount. 

The spreads — yields of state development loans over equivalent maturity government securities — are about 80 basis points for the 10-year segment. This is reasonable, considering that in normal times the spreads remain within 50-60 basis points.  

At the first glance, this may look like good news for the bond market, but market participants are not so sure.  

“States are not borrowing because they are focused on fighting the Covid surge. They have not really started spending on other projects. Once the pandemic subsides, they will bunch up their issuances and that will create a lot of stress in the market,” said the head of treasury of a foreign bank. 

The reason for states going slow on tapping the bond market could also lie in the Reserve Bank of India’s (RBI’s) accommodation to them.  Care Ratings surmised that some states could be availing of the short-term borrowing through SDF (special drawing facility) and WMA (ways and means advances), in place of long-term borrowing through the issue of state development loans (SDL).  
 

“The borrowing via SDF and WMA being linked to the repo rate comes at a lower cost than the funds raised through the SDL issue. The WMA of the states as of April 30, 2021, at Rs 4,506 crore, was significantly higher than the Rs 2,363 crore as of April 23, 2021,” Madan Sabnavis, chief economist of Care Ratings, said.

Bond dealers say the other reason could be that states themselves could be burdened with interest cost and want to go slow. Besides, unlike last year, the lockdown is localised. Economic activities have slowed down, but have not halted like last year. Whatever the revenue getting earned, states can make do with them. 

Besides, they could be waiting for financing costs to dip even more. Even companies and public sector units have cut down on their borrowing plans, expecting bond yields to fall further owing to the accommodative policies of the RBI.  

“The markets don’t have an appetite for SDLs at this point. The G-SAP (government securities acquisition programme) is not for SDLs. Though the cost of borrowing is relatively low for now, in every auction, the yield is inching up. Yields will likely spike if states try to raise funds in this environment,” said the bond dealer quoted above.