State borrowing costs to rise in H2 FY24 on hardening of yields: Report

Capital expenditure of 13 major states is expected to grow 29% YoY, says ICRA

Borrowing costs for state governments and union territories are expected to increase in the second half of Financial Year 2023-24 (FY24) on rising bond yields and widening of spreads up to 15 basis points, ratings agency ICRA has said.

The rise in spreads for state government bonds over government of India bonds (G-sec) is likely to be pronounced in the fourth quarter of FY24, according to ICRA.

Aditi Nayar, chief economist of ICRA, said the normal spread between 10-year state paper and G-secs in Q1 to Q3 used to be 60 basis points in pre-pandemic times. The spread used to go to 80-100 bops in Q4. "I do not think we would see that kind of rise in spreads any more,” she said.

“The system has come into reasonably sustained a lower spread regime for the time being. This year, the spread may be under 40 basis points for the most part of the year. In the fourth quarter it (spread) may be in the range 40-55 basis points,” said Nayar at a webinar on state government borrowings and revenue growth.

ICRA said the combined capital expenditure of its sample of 13 major state governments is expected to grow 29 per cent year-on-year (YoY) to Rs 6.2 trillion in FY2024 compared to Rs. 4.8 trillion in FY23. However, the capex may modestly miss the FY2024 Budget Estimate (BE) of Rs. 6.7 trillion.

With revenues likely trailing budgeted targets, the deficit of the sample set is estimated at Rs. 2 1 trillion as against budgeted Rs 1.4 trillion in FY24. Fiscal deficit may rise to Rs. 8.3 trillion against budgeted Rs. 7.7 trillion.

The leverage (debt + guarantees) level of the sample states is estimated to rise to 30 per cent of the Gross State Domestic Product (GSDP) in FY2024 from 28.9 per cent of GSDP in FY2023.