Spike in state borrowings spooks bond market; Rs 961 cr devolved

ENS Economic Bureau Posted online: Saturday, Jun 28, 2014 at 0000 hrs
New Delhi : Market borrowing by state governments is going to exceed Rs 2 lakh crore this fiscal, about a third of the estimated size of Central government borrowings. On Friday, the Reserve Bank of India announced that state governments will borrow up to Rs 55,000 crore for the quarter July to September 2014.

In this fiscal, the states have already borrowed Rs 50,526 crore from the markets, a 56 per cent jump over the same period of last year.

“The amount will be raised through auction of State Development Loans (SDLs) generally on the second and fourth Tuesdays of the month. The Reserve Bank would endeavour to conduct the auctions in a calibrated manner and evenly distribute the borrowings throughout the quarter” the RBI release noted.

While the RBI has been giving such an advance announcement about the size of state government loans for the past two years, the size of the borrowings has surprised the markets. As the borrowings have risen, the bond market has got rattled.

On Friday, at the weekly auction of Central government papers, the market did not pick up Rs 961 crore of securities, which had to be made good by the primary dealers to the issue.

Some of the reasons why the states are spending more is because they are trying to provide a higher support to the farmers.

The ministry of consumer affairs and public distribution has issued a warning to states earlier this month that they will have to foot the bill for paying more than the minimum support price to farmers for wheat and paddy.

Taking cue from the Centre’s instructions, Rajasthan has decided to discontinue offering bonus to farmers for wheat purchase from the next Rabi marketing season, but Madhya Pradesh has asked the Centre to reconsider the order.

The ministry has said the Food Corporation of India will restrict its procurement of foodgrain from those states which offer bonus to farmers.

States such as Madhya Pradesh, Chhattisgarh, Rajasthan and Tamil Nadu, in the last few years, have been announcing the bonus over MSP.

The incentive to offer the bonus could be higher this year as the monsoon is expected to be weak increasing stress in the countryside. Chhattisgarh has been offering a bonus of Rs 270 per quintal over the paddy MSP declared for the year since FY13 while Madhya Pradesh has announced a bonus of Rs 150 for FY15 Rabi marketing season, which Rajasthan too had followed.

The financial problems for the states have compounded as tax devolution from the Centre declined in FY14 as the growth rates for the economy sputtered. So the states have to borrow more. While the states raised only Rs 32,026 crore in the first quarter of FY14, the sum had ballooned to Rs 60,000 crore by the last quarter to reach Rs 1,96,000 crore for the year.

Saugata Bhattacharya, senior vice president, Axis Bank said he would expect the states to borrow about Rs 2,10,000 crore for FY 15.

But if the GDP growth rate for the year remains sluggish this could be breached handsomely.

MONEY FROM MARKET

* In this fiscal, the states have already borrowed Rs 50,526 crore from the markets, a 56 per cent jump over the same period of last year

* The ministry of consumer affairs and public distribution has issued a warning to states earlier this month that they will have to foot the bill for paying more than MSP for wheat and paddy

* The financial problems for the states have compounded as tax devolution from the Centre declined in FY14 as the growth rates for the economy sputtered