New debt ceiling norms cloud States’ borrowing plans

With States’ borrowing limits for this fiscal set to be pared in tune with their off-budget borrowings since 2020-21, some States that had borrowed more in the pandemic-hit years could face challenges in raising resources, rating agency ICRA said on Tuesday.

While ICRA expects States to borrow ₹8.4 lakh crore during 2022-23, with a borrowing limit of 3.5% of GSDP (Gross State Domestic Product), the off-budget debt calculations could lead to large downward adjustments in some States’ effective borrowing room even as the uncertainty around the Centre’s payment of pending GST compensation dues has confounded their borrowing plans.

Noting that while including off-budget borrowings raised by State entities in the State governments’ own debt would enhance transparency of a State’s finances, some States could find this change difficult to comply with, given the ‘perceived proliferation’ of such borrowings since COVID-19’s onset, the agency said. Those facing large cuts in their borrowing ceilings on this account would have to reduce borrowing plans and resort to greater ways and means advances or overdrafts from the Reserve Bank of India.

It was difficult to ascertain the downward adjustments that may be necessitated to each State’s borrowing limits due to the paucity of adequate data on off-budget borrowings and guarantees extended by the States, ICRA observed, adding that States like Andhra Pradesh, Tamil Nadu, Uttar Pradesh and Telangana, had sharply ramped up extension of guarantees to State level entities in 2020-21.

The Centre typically conveys the net borrowing ceiling for each State at the beginning of the fiscal year and this year, it has indicated that all incremental off-budget borrowings since 2020-21 will be adjusted from this year’s ceiling. States have also been offered an additional borrowing limit of 0.5% of GSDP for undertaking specified power sector reforms, and a further leeway equivalent to their contributions into the National Pension System for government employees. 

The uncertainty about borrowing room appears to be reflecting in States’ tentative participation in the auction calendar for State Development Loans. On Tuesday, even as yields on State Development Loans spiked, Haryana and Punjab borrowed ₹2,000 crore though they had not indicated any plan to participate In this week’s issuances, Maharashtra and Andhra Pradesh together raised ₹500 crore more than they had planned to. Eight States that had planned to borrow ₹6,300 crore did not bother to participate.

ICRA economists noted that the timing of revenue flows from the Centre for GST compensation, tax devolution and the ₹1 lakh crore loan offered for capital spending will be critical as front-loading their remittances would increase the likelihood of enhanced capital spending, whereas back ending would end up reducing the borrowing amount.