COVID-19: Indian States Resorting to Market Borrowings to Fund Increasing Expenditure, Says Report
State government across India are at the forefront of the fight against the coronavirus (COVID-19) pandemic. They have the onerous task of effectively implementing the lock-down to contain the spread of the pandemic while also ensuring the proper functioning of the state machinery to meet the essential requirements of its citizens. With revenues witnessing a sharp drop due to the lock-down, states have been resorting to market borrowings to fund their expenditure, says a research note.
In the report, CARE Ratings says, “The relief measures entail higher expenditure to be incurred by the state governments even as they are faced with a significant loss of income or revenues from the halting of economic activity. State governments have cumulatively borrowed Rs59,255 crores during April 2020, double that raised in the same month of year ago. There has been a rise in the cost of market borrowings for states in the month. The yields for the majority of states in April 2020 also rose from a month ago period.”
States have been resorting to market borrowings at a higher cost to meet their financing needs. State governments have cumulatively borrowed Rs59,255 crore during April this year, double that raised in the same month of year ago. In the past four fiscal years (FY16-17 to FY19-20), the state government market borrowings in April has ranged between Rs14,080 crore to Rs31,728 crore. Many states have already raised a sizeable portion of their permissible market borrowing, based on consent of Union government, for nine months of the fiscal year in the first month itself.
Kerala and Manipur have raised 44% of their permissible market borrowings for nine months of 2020-21 while Haryana, Odisha and Andhra Pradesh have raised between 33%-39%. Similarly, Tamil Nadu, Telangana, Mizoram and Uttarakhand in April 2020 availed 24%-28% of their nine-month borrowing limit.
“The increase in market borrowings of states was accompanied by a rise in the cost of funds in April 2020. Concerns of higher government borrowings, both by central and state governments, over and above the budgeted borrowings has led to an increase in the cost of borrowings for states despite the cut in interest rates by the Reserve Bank of India (RBI) and sizeable liquidity in the banking system. The yields for the majority of states in April 2020 rose from month ago,” CARE Ratings says.
According to the report, Kerala has seen the highest increase in the cost of market borrowing. The weighted average yield for the state’s borrowing across tenures (10-15 years tenure) in April 2020 was 133 basis points (bps) higher than month ago. The yield of the 10-year securities was 93bps higher. About 11 states saw their yields increase by more than 50bps on a month-on-month basis in April 2020. The state-wise yield range and movement (Table 3) is reflective of financial stress being faced by the states.
The first auction of state government securities held on 7 April 2020 saw a sharp increase in the yields across states. There has been a moderation in the yields since then.
To meet financial exigencies during the lock-down, the states could also be availing funds from the RBI ways and means advances (WMA) facility, given that the limit for the same has been raised (by 60%). In the past it has been seen that not all states and UTs have been seeking financial accommodation from RBI under this facility. During April 2019-Febraury 2020, 15 states and one UT did not avail WMA. Even some fiscally pressured states which have sizeable revenue deficits like Tamil Nadu, Rajasthan, and Maharashtra did not seek WMA from the RBI, CARE Ratings says.
According to the ratings agency, even before the national shutdown since 25 March 2020, states across the country have been in various stages of lock-down. State governments have since announced various measures to mitigate the impact of shutdowns on various sections of society. These have predominantly been in the nature of relief measures to ensure subsistence for the most affected segments.
With loss of revenues due to the shutdown of business and commercial activities being accompanied by an increase in expenditure towards relief measures, states are under considerable fiscal stress, CARE Ratings says, adding state governments have been reported to be delaying or cutting down its expenditure, in some cases even committed expenditure such as salaries and wages, reflective of the fiscal pain being endured.
“This will no doubt have a sharp bearing on the finances of the states, many of whom were experiencing fiscal pressures even before the advent of the pandemic. The quantum of fiscal costs for the states is difficult to estimate given the evolving nature of the pandemic, the various stages of easing of the lock-down and the measures undertaken,” it added.
Till date, 27 states and three union territories (UTs) have announced relief measures in light of the lock-down. The relief measures have mainly been in the area of food relief and financial aid to the weakest sections of society. Assistance to migrants, benefits to front line workers, pension relief and relaxation or cut in tariffs and fees are among the prominent measures announced by the states. Most states and UTs are yet to announce economic relief or stimulus for affected sectors or measures for the revival of the local economy.
States with pre-existing fiscal stress such as Andhra Pradesh, Rajasthan, Maharashtra Kerala and Tamil Nadu that have budgeted for sizeable revenue deficits in 2020-21 even before the lock-down have announced delays or cuts in salaries and benefits for government employees. Even states that have budgeted healthy revenue surplus for 2020-21 such as Odisha (Rs9,509 crore) and Telangana (Rs4,482 crore) have cut salaries for government employees. This, the ratings agency says, highlights the pressure on finances across states.
CARE Ratings says, “With limited avenues available to shore up their revenues, state governments have been raising taxes on transport fuels. The fall in global crude oil prices enable governments to hike the taxes on these fuels without raising the prices paid by consumers, thereby limiting the gains of lower prices to consumers. Assam, Meghalaya, Nagaland and Haryana have hiked fuel tax in recent days. In the first nine months of 2019-20, the taxes and duties on petroleum products contributed Rs1,59,144 crore to the exchequer of states.”
“States have been seeking a central government relief package and an amendment to the Fiscal Responsibility and Budget Management (FRBM) Act to enable them to undertake increased market borrowings. The states are to undertake Covid-19 related relief measure for a certain duration of time even as with revenue shortfalls. This would increasingly strain their financial position and this would inevitably result in a cut in their capital outlays, which in turn have implication for future growth,” the ratings agency concludes.