Despite the slackness in borrowings by states so far in the current financial year, the Centre will likely permit them to borrow up to 75% of their annual borrowing limit in the first nine months of the next financial year. The Centre seeks to ensure that states have enough resources to step up capex.
“We will likely stick to the 75% sanction limit for April-December in line with the past few years’ practice to ensure states have enough resources in the initial months for development expenditure,” an official told FE.
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This roughly works out to be about Rs 6.4 trillion as states’ annual net borrowing ceiling (NBC) would be about `8.6 trillion (3% of GSDP) for FY24.
Rise in tax revenue receipts, the central capex assistance (Rs 76,000 crore for FY23) and higher borrowing costs have led most states to keep their borrowing reined in so far in the current fiscal. However, this has led a slowdown in their capex vis-a-vis revenue expenditures.
An FE analysis of the combined borrowings of 18 states showed that their borrowings declined 27% on-year to Rs 3.25 trillion in April-December 2022. The weighted average cut-off of the state government securities rose by about 7 bps to 7.68% on February 28 from 7.62% in the last auction, following concerns related to monetary tightening.
However, states’ borrowings may pick pace in the next financial year as the Centre has linked one-third of the Rs 1-trillion untied long-term interest-free capex loans to states’ achieving incremental capex in FY24 over FY23. Of the full-year capex target, states have to achieve 45% in H1 next year compared to previous years’ trend of about 30%, to get a third of the capex loans released. States have to refund that much to the Centre in the subsequent year if they don’t meet the incremental capex target set for FY24.
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With the combined fiscal deficit (2.8% in FY22 against the Budget estimate of 3.5%) of the states reducing to the level before the pandemic aided by buoyant revenue collections and lower borrowings, a Reserve Bank of India report recently said states should mainstream capital expenditure planning rather than treating them as “residuals and first stops” for cutbacks to meet budgetary targets. States’ combined fiscal deficit is also likely to remain below 3% of their GSDP in FY23 against their Budget estimate of 3.4%.
