Low-cost funds: Odisha, Maharashtra eye loans from rich PSUs instead of market

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Published: April 21, 2020 3:00 AM

Like Maharashtra and Telangana, Odisha has also been forced to cut expenditure and defer some others, including salary payments to manage the finances at the current juncture.

Adhering to the FRBM-mandated fiscal deficit ceiling of 3% of GSDP, Odisha has pegged its gross borrowing at Rs 24,450 crore and net borrowing at about Rs 18,000 crore for FY21. Adhering to the FRBM-mandated fiscal deficit ceiling of 3% of GSDP, Odisha has pegged its gross borrowing at Rs 24,450 crore and net borrowing at about Rs 18,000 crore for FY21.

Instances of some state governments resorting to market borrowings at exorbitant costs seem to have prompted a few states to look for alternative ways to finance their coronavirus-related expenditure. At least two states- Odisha and Maharashtra – are going to seek soft loans from their cash-rich public sector undertakings soon. The idea is to reduce market dependence at this juncture, when several states are frontloading their borrowings, which, along with the risk-averse attitude of the banks, is causing bond yields to rise.

Ashok Meena, finance secretary with the government of Odisha, told FE that the state might borrow from Odisha Mineral Bearing Areas Development Corporation (OMBADC), a state government undertaking with which a robust corpus of Rs 17,000 crore is lying un-utilized, to tide over current financial difficulty. “OMBADC may not be able to quickly spend the entire funds in its custody created out of penalties imposed on mining firms. We can borrow from it for the time being,” he said.

Maharashtra, which is expecting huge shortfall in revenue receipts in at least the first three months of this fiscal, is also looking at the option of tapping cash surpluses with the state PSUs for additional funds. The state’s finance secretary (expenditure) Rajiv Kumar Mittal confirmed this to FE, but refused to elaborate further.

As reported by FE recently, the Odisha government has asked the Centre to remove the 30% cap on the use of the District Mineral Funds to fight Covid-19 in each affected district. The move indicates the willingness of the state, which has the largest DMF corpus among the Indian states (with unutilised balance of Rs 7,000 crore), to use this resource rather liberally to give succour to people impacted by the pandemic. Use of DMF doesn’t entail any budgetary outgo so it is fiscally more prudent.

Even though Odisha is a revenue surplus state and can manage its finances for Q1FY21 by reprioritising spending, it has to borrow thereafter if tax revenues continue to be much lower than budgeted, Meena said.

OMBADC has created a huge corpus since 2017 after Supreme Court ordered that mining companies pay penalties for extracting iron and manganese ore beyond the limits approved under environment clearance rules. OMBADC is required to use these funds for specified purposes like supply of safe drinking water, education and skill development, health services, livelihood promotion, etc, in eight mining-affected districts of the state. The funds are, however, in the very early stages utilisation and, therefore, a large amount is lying with the undertaking.

Adhering to the FRBM-mandated fiscal deficit ceiling of 3% of GSDP, Odisha has pegged its gross borrowing at Rs 24,450 crore and net borrowing at about Rs 18,000 crore for FY21. To manage its finances, the state may postpone capital expenditure, a handsome Rs 35,209 crore earmarked for the full year till finances improve, Meena said.

Like Maharashtra and Telangana, Odisha has also been forced to cut expenditure and defer some others, including salary payments to manage the finances at the current juncture. Some other states like Kerala, which are likely to borrow more than their FY21 plan, are looking for avenues such as securing loans from the Asian Development Bank and World Bank to supplement market loans.

Hard-pressed, some states are even disregarding the exorbitant costs such fund-raising entails, in a clearly risk-averse, jittery market. While the RBI’s indicative calendar put the ceiling for market borrowings by the state governments in Q1FY21 (April-June) at Rs 1.27 lakh crore, 56% higher than the state development loans (SDLs) raised by them in the year-ago quarter, on April 7, in the first instance of SDL auction in the new fiscal year, 19 states among them raised a total amount of Rs 32,560 crore, against Rs 37,500 crore sought by them. In fact, the bonds sold by these states on that day were 44% higher than the indicative total in the RBI calendar.

With many states planning to front-load borrowings in Q1FY21, the RBI on Friday enhanced the ways and means advances (WMAs) for them by 60% (from the level as on March 31) to about Rs 51,560 crore for H1FY21, to encourage the states to spread out their borrowings.

So far in April, Kerala has utilised 91% of its Q1FY21 SDL quota of Rs 6,500 crore, Odisha 67% of its share of Rs 4,500 crore and Maharashtra 40% of its quota of Rs 17,500 crore.

Rating agency ICRA has estimated a 25%-30% increase in net SDL issuance to Rs 6.2-6.4 lakh crore in FY21 from the level of Rs 5 lakh crore in FY20. It has estimated gross SDL issuance to rise by nearly 19%-23% to Rs 7.6-7.8 lakh crore in FY2021, from Rs 6.3 lakh crore in FY20.

Market analysts reckon that the states and the Centre would go for very substantial extra borrowings over and above their budget estimates, a possibility which is getting priced in the bond auctions already.

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