Fewer States Tap Markets for Funds This Year, Says Care Ratings

Fresh curbs in most states has again led to loss of economic output, though less severe than last year

Fewer States Tap Markets for Funds This Year, Says Care Ratings
Fewer States Tap Markets for Funds This Year, Says Care Ratings
OLM Desk - 11 May 2021

Fewer number of states have been seen to be tapping the markets for funds so far in the current financial year as against the previous corresponding period. The quantum of borrowing has also been lower this year.

Seven states raised a total of Rs 12,150 crore at the auction of the state government securities or state development loans (SDLs) held on Tuesday. The aggregate state government borrowing during April 8 to May 11 has been 54 per cent less than the comparable figures last year, according to a report from CARE Ratings.

Only 12 states and one Union Territory have raised a total of Rs 37,200 crore so far in 2021-22 as opposed to the 22 states and one Union Territory that raised Rs. 81,005 crore in the comparable period of 2020-21.

As per the tentative borrowing calendar, 23 states and one Union Territory were to raise Rs 81,900 crore between April 8 and May 11 this year. However, only 45 per cent of this amount has been raised by 10 states and one Union Territory.

The decline in the number of states opting for market borrowing could largely be ascribed to the lower expenditure undertaken by the states relative to their revenues, the report said.

Some states could also be availing the financial accommodation being provided by the RBI such as short-term borrowing through SDF (special drawing facility) and WMA (ways and means advances), in place of long-term borrowing through the issue of SDLs. The borrowing via SDF and WMA being linked to the repo rate comes at a lower cost than the funds raised through the SDL issue. The WMA of the states as of April 30, 2021 at Rs 4,506 crore was significantly higher than Rs 2,363 crore as of April 23, 2021.

The borrowing cost for the state governments at today’s auction was nearly stable at week ago levels. The weighted average cost of borrowing for the state governments through the auction of dated securities; across states and tenures, was 6.85 per cent.

The weighted average yields of SDLs have risen by 29 bps since the first auction on 8 April 2021, reflective of the lower demand for these securities amid anticipated higher supply in coming periods. Investors are seen to prefer central government securities as the RBI has been undertaking secondary market purchases of G-Secs. The increased demand for G-Secs has helped lower yields of these securities. The benchmark 10-year GSec yield has been ruling around 6.0 per cent, 5 bps lower than the average yield in April 2021, said the CARE study.

States and UTs resorted to higher market borrowings in 2020-21 as lower economic activity consequent to the lockdown and restrictions impacted their revenues. In 2020-21, 28 states and two Union Territories cumulatively raised a total of Rs 7.98 lakh crore via market borrowings, 26 per cent more than the borrowings of Rs 6.35 lakh crore in 2019-20.

“Although the imposition of fresh curbs across nearly all states has once again led to a loss of economic output, it is not as severe as compared with year ago given the less stringent and localised nature of lockdowns in many regions thus far. However, given the sharp resurgence in the pandemic, restrictions and lockdowns are expected to be in place for an extended period across regions. This would pose a setback for the revival of the region’s economy and could impact revenue collections of the government. The reliance of states on market borrowings is likely to continue in 2021-22 also,” CARE Ratings said.