FY21 gross state borrowings to touch Rs 7.8 L cr on Covid crisis


MUMBAI: Domestic rating agency Icra has said states with higher patient count, returning migrant labour and daily wagers, as well as greater dependence
on GST compensation, will face sharper risk of fiscal slippages this fiscal and has projected around 23 per cent spike in combined
borrowings at around
7.8 lakh crore.

The fear of massive fiscal slippages by the states was visible from the spike in interest rates that the states were forced
to offer
on their first tranche of the market
on Tuesday with states like Kerala which has been leading the
Covid fight, paying as much as 8.96 per cent
on its
Rs 6,000 crore borrowing.

Such aricing of debt has forced the Kerala finance minister
to seek the issuance of pandemic bonds.

An SBI Research earlier the week backed monetizing the public debt this fiscal and also launching a
Covid bond.

In a report, Icra has estimated a 25-30 per cent rise in net
state development loan (SDL) issuance
Rs. 6.2-6.4 lakh crore in FY2021 from around
Rs 5 lakh crore in FY2020, following the negative impact of the
Covid-19 pandemic
on their revenue, even as their expenditure is likely
to expand
to address the

“With SDL redemption estimated at around
Rs 1.4 lakh crore in both these years, we forecast
gross SDL issuance
to expand by 19-23 per cent
Rs 7.6-
7.8 trillion in
FY21, from
Rs 6.3 lakh crore in FY20,” says the report.

It has further warned that the states with higher number of
Covid-19 infections, returning migrant labour and daily wagers may undertake a sharper step-up in their expenditure, while those with a larger dependence
on GST compensation could experience greater revenue stress, enlarging their risk of fiscal slippage in FY2021.

The risk of fiscal slippage is likely
to be higher for states, which have a larger number of
Covid-19 patients, as they may have
to significantly ramp up spending
on health-related services
to contain this outbreak.

Moreover, states which have seen return of a massive number of migrant labourers, and which have a sizeable number of daily wagers, could see a sharp rise in their revenue expenditure in
FY21, if they choose
to extend food and/or income support
to such people.

The report also notes that
gross tax collections of the Centre are set
to undershoot the revised estimate of
Rs 21.6 lakh crore by
Rs 1.2-1.3 lakh crore. This would entail lower tax devolution
to the states
to the tune of
Rs 42,000-55,000 crore, which would be adjusted in

Additionally, the
FY21 estimate of
gross tax revenue of the Centre at
Rs 24.2 lakh crore is also likely
to be considerably lower, given the impact of the lockdown
on economic activities. Therefore, the actual central tax devolution
to the states in
FY21 is expected
to be significantly lower than the
FY21 budget estimate of
7.8 lakh crore.

The house economists at SBI feel that in the current scenario when market appetite is already low it seems difficult how large
borrowings will be carried out.

“Thus, it is imperative that government monetise its deficit with RBI subscribing
to the primary issues of the g-secs and fulfill the supply-demand gap in
FY21,” the SBI report said.

In FY2019-20, total borrowing by the Centre and states were at
Rs 13.5 lakh crore–Centre at
Rs 7.1 lakh crore and states at
Rs 6.4 lakh crore. Given at least estimated 4 per cent slippage in GDP or worth
Rs 8 lakh crore, the Centre and the states are expected
to borrow close
Rs 20 lakh crore in FY2020-21.

“Thus it’s a must that RBI monetises the deficit, using the national calamity clause given the stressed market absorption capacity. This number must be anywhere between 2.5-3 percent of GDP and shown separately as an off balance sheet item in budget like a
Covid bond, which can send a good signal
to the market that the unprecedented move is temporary,” concludes the SBI Research report.


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