The New Normal for State Borrowings

Context: Amidst the pandemic, as the dependence of states on market borrowing is going to continue, it is important that the states time the market well while borrowing to minimize the borrowing costs.

Trends in State Borrowings during the pandemic:

• Moderate correlation between the number of Covid-19 cases and borrowing (close to 45%): The two outliers are:

• Uttar Pradesh - largest borrower but does not have the highest number of COVID cases.
• Maharashtra – Highest number of COVID cases but borrowed only half the amount borrowed by UP.

• Higher borrowing yield: Some states showed immediacy in raising funds leading to higher borrowing yield for them when compared to states like Tamilnadu, which delayed their borrowings.

• UP made almost 96% of the borrowings in March itself.

• Most borrowing at the medium end: This has also increased the borrowing cost for some states like Tamilnadu and West Bengal when compared to Central Government borrowings:

• The bond yield for these states has been 30 basis points than the Government of India bond yield.

Problems faced by the states: Since the states are the frontline of pandemic management and are dependent on borrowings because of the following challenges:

• Goods and Services Tax (GST) Shortfall: Since the promulgation of GST, state revenue depends majorly on GST collections.

• 27 states have already borrowed almost Rs 1 trillion, which is close to shortfall in GST collections.
• Fall in consumption of petrol/diesel, sale of alcohol, and decline in automobile sales have also impacted tax collections.
• Citizens are avoiding spending on non-essential goods and services.

• Uncertain trajectory of Covid-19: India is adding about 1,00,000 Covid-19 patients in less than a week, which puts a strain on states’ health care spending.

• Cost of migrant labour: States like UP and West Bengal, which are the destination of reverser migration, are stressed due to increased expenditure in feeding the jobless.

• Issues with state government borrowings:

• Lack of dynamic state government securities (SGCs) market: SGCs are primarily held by the provident fund and insurance companies which lack active secondary market.

• Non-existent open market operations for the SGSs.
• States are seldom distinguished on the basis of their fiscal conditions and associated credit ratings.

Conclusion: The Fifteenth Finance Commission has cautioned against the rising challenges due to borrowings by both Centre and States in the face of pandemic. A prudent government borrowing programme is needed.