States Allowed To Borrow Rs 3.2 Lakh Crore in April-December

The central government has allowed states to raise Rs 3.2 lakh crore in net market borrowings in the first nine months of the the ongoing financial year.

States will be able to raise 50 percent of the increased net borrowing limit in April-December, according to a government notification. The Reserve Bank of India will make necessary arrangements to raise the limit in consultation with states, it said.

If there’s a need to borrow more in the first nine months of the current financial year, as is anticipated due to the fallout of Covid-19, the centre will process requests to increase open market borrowing during the period, the notification said.

This means the net borrowing by states in 2020-21 could be around Rs 6.4 lakh crore, which is still 3 percent of the GDP and is within the limit under the Fiscal Responsibility and Budget Management Act, said NR Bhanumurthy, a professor at National Institute of Public Finance and Policy.

In FY20, net market borrowings by states were budgeted at Rs 4.4-4.6 lakh crore. The actual numbers are yet to be disclosed.

Under the increased limits, Maharashtra will be able to raise Rs 46,182 crore in April-December 2020, while Uttar Pradesh and Tamil Nadu will be able to borrow Rs 29,108 crore and 28,880 crore, respectively.

States don’t generally use the entire borrowing limit allowed by the centre in a year but this year might be different due to the coronavirus outbreak, a government official told BloombergQuint on the condition of anonymity. The states can also exhaust the borrowing limit earlier, and request the central government to borrow more, he said. The centre can authorise states, based on borrowing needs and actual cash availability, in early second half of the financial year, the official said.

The borrowing calendar, however, raises concerns that whether states will raise the remaining 50 percent of the net borrowing limit in the last quarter, a situation that could flood the market with bond issuances. Already, the fear that states and the centre will have to borrow more to fund expenditure related to the spread of Covid-19 has pushed up bond yields even after the Reserve Bank of India cut policy rates and flooded the system with liquidity. States’ borrowing costs spiked on Tuesday, the first bond auction of the current financial year. The highest borrowing rate of 8.96 percent was paid by Kerala which raised Rs 1,930 crore for a 15-year duration.

According to Bhanumurthy, the window given to states is for nine months, and some of them can exhaust their limit earlier and stagger their borrowing in the remaining period. The RBI will also have to step in and manage bond issuances so that there is no flooding the market with state bond issuances in addition to central government borrowing programme, he said.

He, however, said the central government should allow states to exceed the market borrowing limit due to increase in expenditure to control the Covid-19 pandemic. It should also provide fiscal support to states for loss of economic activity and in providing relief to the weaker sections of society, he said.