Easing of buffer fund rules to release Rs 13,300 crore to states

By: |
May 23, 2020 1:20 AM

Besides the benefit of their borrowing costs being reduced in the light of the liquidity enhancement resulting from the monetary steps unveiled by the RBI on Friday and earlier, the state governments could also gain from the easing of the rules to withdraw funds from the reserves kept by them with the RBI to meet exigencies.

The relaxation of withdrawal norms for the so-called consolidated sinking funds (CSF) for the period till FY21-end will release an extra Rs 13,300 croreThe relaxation of withdrawal norms for the so-called consolidated sinking funds (CSF) for the period till FY21-end will release an extra Rs 13,300 crore.

Besides the benefit of their borrowing costs being reduced in the light of the liquidity enhancement resulting from the monetary steps unveiled by the RBI on Friday and earlier, the state governments could also gain from the easing of the rules to withdraw funds from the reserves kept by them with the RBI to meet exigencies.

The relaxation of withdrawal norms for the so-called consolidated sinking funds (CSF) for the period till FY21-end will release an extra Rs 13,300 crore, which is expected to help the states meet about 45% of their redemption obligations for the fiscal.

Of course, the states that will benefit the most are those which have managed to keep large amounts in the CSF reserves, namely Maharashtra, Gujarat, Odisha, West Bengal, Andhra Pradesh, Bihar and Tamil Nadu (see chart).
The CSF is a reserve fund created by states for amortisation of their debt obligations. With its utility now being established, analysts feel more states would opt to maintain and bolster this rainy-day fund.

Under the CSF scheme, a state government could contribute 1-3% of their annual outstanding debt liabilities to the fund to create a buffer for repayment of their future liabilities. Set up in 1999-00, the CSF has accumulated reserves worth Rs 1.3 lakh crore for 23 states as on March 31, 2020.

Recently, the Centre has raised the borrowing limit for the states to 5% of their respective gross state domestic product (GSDP) from 3% earlier, in a move that could theoretically make available an additional Rs  4.28 lakh crore to all states combined, if the facility is fully used up. Of course, all states may not be able to fully use the facility, given that only 0.5% of GSDP is available to them unconditionally, and the balance is linked to certain conditions of reforms in four critical areas.

The RBI had earlier enhanced the ways and means of advances to states 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.

Also, the Centre has transferred total amount of Rs 92,076 crore to states as tax devolution for April-May, sticking to the Budget target and notwithstanding the huge tax revenue shortfall the Centre itself is facing. Expenditure secretary TV Somananathan had told FE in an interview recently that the Centre released nearly double the amount collected by it as taxes in the first two months of this fiscal year to states as their tax share from the divisible pool.

Also, a total of Rs 12,390 crore has been released to the eligible states as revenue deficit grants in April-May.
The RBI’s indicative calendar put the ceiling for market borrowing by the state governments in Q1 (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, spike in yields of state development loans (SDLs) forced some states like Andhra Pradesh not to accept bids in auction while Kerala was forced to borrow at a high rate of 8.9%.

However, even with these relaxations and succours, some states might face problems in mopping up funds to meet their enhanced expenditure requirements; in many cases the axe might fall on capital spending. SBI EcoWrap wrote recently that states’ capital expenditure in FY21 might turn out to be half the budgeted level of Rs 8.8 lakh crore. FE has recently reported state governments had applied brakes on capital expenditure even in the second half of FY20. What the states are going to witness is an unprecedented deep fall in capex that started somewhere in the middle of last fiscal and through FY21.

D K Srivastava, chief policy advisor at EY India, wrote: “Together with the borrowing requirements of public sector undertakings of 3.5% of GDP, this (Centre and states’ extra borrowings) adds up to 15.5% of GDP. This may exceed the available resources for borrowing at about 9.5% of GDP, based on surplus savings in the system and net capital inflows. This large imbalance is bound to drive government’s borrowing cost upwards. The additional liquidity through RBI’s most recent initiative will help check this upward thrust of public sector borrowing cost. The lower interest rates, on the other hand, may be detrimental to the household sector saving rate which may suffer due to both income and price effects”.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Supreme Court directive: Centre notifies interest relief scheme
2Govt taking steps to strengthen agriculture sector: PM Modi
3No more happy hours! High Corona tax backfires, liquor sales halved in last 5 months