State borrowings unlikely to cover revenue losses

Economy


KOLKATA: State governments can now borrow more but that won’t be enough to cover their revenue losses because most of the additional limit are contingent on meeting reforms mandated by the Centre.

The collective revenue losses of states are estimated at Rs 6.4 lakh crore, of which only 50% can be compensated through borrowings, leaving a Rs 3.2 lakh crore gap, according to State Bank of India’s economic research wing.

“We expect states to strip their estimated budgeted capital expenditure for FY21 by a minimum 50% from Rs 8.8 lakh crore,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.

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State finances are already stretched, having collectively borrowed Rs 6.34 lakh crore in FY20, which is a 33% increase from the preceding financial year.

Uttar Pradesh (Rs 67,453 crore), Tamil Nadu (Rs 62,425 crore) and West Bengal (Rs 59,242 crore) remained the top borrowers.

The Central government increased the borrowing limit of states to 5% of their gross domestic product from 3% as a one-time measure to fight the pandemic, relaxing the Fiscal Responsibility and Budget Management Act guidelines.

This gives states additional borrowing of Rs 4.28 lakh crore. The additional 0.5% increased limit is unconditional, which means states can borrow up to 3.5% of their GDP freely.

However, the remainder will be allowed in tranches and provided they adopt ‘one nation, one ration card,’ implement reforms of local urban bodies and power sector distribution companies and improve the ease of doing business.

“The Centre’s borrowings have already been raised by 2% of GDP. States’ debt issuance, meanwhile, is likely to go up in phases, from 3% to 5% of GSDP, subject to pre-set conditions, potentially taking overall borrowings to 12% of GDP,” said Radhika Rao, an economist at DBS Group.

With revenue vanishing, especially due to the shortfall in the goods and services tax and stamp duty collections, state finances are already under pressure. India Ratings and Research estimated a collective revenue loss of about Rs 97,100 crore for 21 major states in April alone after the lockdown brought the economy to a standstill.

“Borrowing cost will increase as more state development loans enter the market. There may not be a liquidity issue per se as there is surplus today, but yields will move up by at least 10-15 bps if all states go for higher borrowings. But this is more likely towards the end of the year when borrowing exceeds the targeted amount,” said CARE Ratings chief economist Madan Sabnavis.

States get their revenue mainly from seven heads – GST, VAT (mainly petroleum products), excise (mainly liquor), stamps and registration fees, tax on vehicles, tax and duty on electricity and non-tax revenue.



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