Indian states, strapped for funds as they seek to counter the fallout of Covid-19 outbreak, saw borrowings costs spike at the first bond auction of the current financial year.
Higher Borrowings, Increased Uncertainty
The rise in borrowing costs from states is a consequence of both higher planned borrowings and increased uncertainty.
Based on the planned borrowing calendar, the central government will borrow 62.5 percent or Rs 4.88 lakh crore in the first half of the year. The indicative calendar released by state governments pegs state borrowings at Rs 1.27 lakh crore in the first quarter, an increase of 15 percent over last year.
The planned borrowings and budgets have been thrown off track by the spread of the novel coronavirus.
According to SBI Economic Research, even if states spend an additional 1 percent of Gross State Domestic Product based on 2018-19 data, the additional expenditure could be to the tune of Rs 1.6 lakh crore. All these could push the state fiscal deficit from budgeted 2.06 percent to 3.5 percent of GSDP, unless backed up by capital expenditure cuts, Soumya Kanti Ghosh, chief economist at SBI, wrote in a note dated March 31.
Ghosh called for increased central support to help states tide over a period of financial stress.
RBI Offers States More Short-Term Support
Separately, the RBI has given some short-term flexibility to states in managing their cash flow mismatches.
- The central bank has decided to increase the number of days for which a state/ Union territory can be in overdraft continuously to 21 working days from the current stipulation of 14 working days.
- The number of days for which a state/ UT can be in overdraft in a quarter has been increased to 50 working days from 36 working days.
- Last week, the RBI had increased the limit for short term state borrowings under the ‘Ways and Means’ advances facility by 30 percent.
The RBI has also set up a committee to give a broader view on the use of the WMA window by states.
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