Statsguru: Covid-19 pandemic forces states to expand their borrowing

Most large states, and 13 out of the 26 that have issued state development loans so far, have borrowed at least 50 per cent more than the previous year

The pandemic’s impact on the economy has forced both the Centre and states to borrow more from the market to finance their expenditure. While the Centre has already expanded its gross borrowing plan to Rs 12 trillion for the financial year, states are also borrowing more by the week.

Most large states, and 13 out of the 26 that have issued state development loans (SDLs) so far, have borrowed at least 50 per cent more than the previous year, Care Ratings noted in its weekly report. But there are some states that have borrowed less (chart 1). While industrial states such as Maharashtra have shown the highest growth, populous north Indian states have surprisingly shown a contraction in SDLs till mid-August (chart 2). 

Tamil Nadu has borrowed close to a massive Rs 40,000 crore in four-and-a-half months, compared to Rs 17,000 crore last year.

States for now have benefitted from the prevalent accounting practice, wherein the devolution happens on the basis of Budget estimates. Despite a fall in actual revenues, the higher Budget figures ensured that states’ share in gross tax revenue of the 

Centre declined by only 10 per cent, as against a fall of 46 per cent in the Centre’s share (chart 3).

It is thus no wonder that the Centre’s borrowings have shown a sharper jump not only over the previous year, but also over the current year's plan (chart 4).

And while states borrow, a three-year state government bond sold in the auction held in the second week of August would yield 4.75 per cent to the buyer, as against 6.47 per cent for the 10-year bond (chart 5), a report by rating agency ICRA showed. But the spread for the latter over the benchmark 10-year G-Sec has risen over 60 basis points. That it was below this level for three weeks in July shows a rising risk aversion at the state level.

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines

Source: Reserve Bank of India, Ministry of Finance