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Amid the tightening of the regulations on states’ borrowings because of the large off-Budget loans by some of them, the Centre has given nod for Rs 5.72 trillion borrowings by the states in the first nine months of FY23. This roughly works out to be 67% of their annual net borrowing ceiling (NBC) of Rs 8.58 trillion (3.5% of GSDP).
Like last fiscal, the borrowing by states was fixed at 75% of their annual ceiling in April-December of FY23. The reduction in actual sanction so far this year is due to part adjustment of FY22 off-Budget borrowings in the FY23 borrowing ceiling for some states.
In June, the Centre decided to lift a virtual freeze on borrowings by some states with large off-Budget liabilities. It has, however, decided to strike off at least 25 basis points (bps) from the NBC of 3.5% of GSDP of these states in FY23, in case off-balance sheet borrowings in FY22 exceeded 25 bps of projected GSDP in the current fiscal.
The balance debt, so estimated, will be brought above the line over three years to FY26 in equal tranches. The off-Budget liabilities were being counted only from FY22 onwards.
In an earlier directive to states, the Centre had said their entire off-Budget liabilities of FY21 and FY22 would be adjusted against the NBC for FY23. If implemented, this policy would have severely restricted the plans of some states like Telangana, Punjab and Kerala to raise funds through state development loans (SDLs) in the current financial year and thereby their capital expenditures. The Centre’s stance has already led to some delay in approvals of annual SDL limits of states, which are usually in place in April in any financial year, but stretched to June this year.
The Centre gave its nod to states in April 2022 for Rs 96,760 crore in market borrowings and another Rs 3,000 crore through negotiated loans. In May, consent was given to states to borrow Rs 292,980 crore from market and an additional Rs 32,873 crore via negotiated loans. In June, states got a nod to raise Rs 123,587 crore from the market and Rs 22,314 crore in negotiated loans.
States can’t borrow beyond the annual limits set by the central government under Article 293(3) of the Constitution. But states do not need prior consent from the Centre to guarantee the loans and advances, and bonds issued by its entities. This has now been made part of the states’ NBC if the loan is being serviced from their budget.
Besides fiscal risk, the tightening of the regulation on states’ borrowings by the Centre is in view of the rising yields on SDLs and the rate hike cycle started by the Reserve Bank of India, which could raise the cost of general government borrowings.
The high cost of government borrowings could inflate public debt, already at a precarious level, further.
The weighted average cut-off of SDLs rose by 3 bps to 7.89% on July 12 from 7.86% in the last auction. According to rating agency Icra, SDL issuance has declined by 26.1% on year to Rs 1.32 trillion in FY23 so far.
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