States borrow only 84% of Rs 1.9-trillion notified amount in first quarter

This initiative entails providing special assistance to State Governments through 50-year interest-free loans, amounting to a total of Rs. 1.3 trillion during the financial year 2023-24.

States and Union Territories (UTs) tapered their borrowing in the first quarter of the current financial year, and borrowed only 84 per cent of the notified amount of Rs 1.9 trillion.

“States are not going for the full amount because they are getting assistance from the central government,” a dealer at a state-owned bank said. “A few days ago, they received some amount from the central government for infrastructural development.”

The central government on Monday granted approval for interest-free and long-term capital expenditure loans amounting to Rs 56,415 crore to 16 states for the fiscal year 2023-24 so far, under the special assistance to states for capital investment scheme.

The scheme, introduced as part of the Union Budget 2023-24, entails providing special assistance to state governments through 50-year interest-free loans, amounting to a total of Rs 1.3 trillion during FY24.

“At the same time they had borrowed only 58 per cent in the first quarter of FY23, so the states’ funds requirement has certainly gone up,” said Indranil Pan, chief economist at YES Bank. “Another way to look at it is that the government is likely to give around Rs 56,000 crore of the Rs 1.3 trillion promised through the Union Budget. Hence, the borrowing requirement was lowered as this fund infusion from the Centre will help the states to meet their capital spend needs. This fund infusion may be a reason why they borrowed 16 per cent lower than the calendarised amount.”

Meanwhile, the yield spread between the 10-year state development loans and the benchmark 10-year government bond currently hovers between 34-35 basis points. Long-term investors are opting for state bonds rather than government ones due to higher returns, dealers said.

“The yield spread is not that much, historically it has even gone up to 50 bps, because there is demand for state-bonds. Hence, the spread has narrowed,” another dealer said. “People are gaining confidence in states, and the fiscal discipline of the states, because there hasn’t been any default after Punjab.”

States’ fiscal position has witnessed a revival from the pandemic-induced deterioration seen during 2020-21. The consolidated gross fiscal deficit (GFD) of states and Union Territories declined from the peak of 4.1 percent of GDP in 2020-21 to 2.8 per cent in 2021-22 and has remained at the same level in 2022-23 as well, which is much lower than the budget estimate of 3.4 per cent for the year, according to fiscal stability report released by the Reserve Bank of India.

This swift consolidation was primarily driven by a decline in revenue expenditure coupled with an increase in states’ own tax revenue led by states’ GST. For 2023-24, the states have budgeted a GFD-GDP ratio of 3.2 per cent, which is significantly lower than the indicative target of 3.5 per cent set by the central government.