The Hindu Business Line : States going slow on borrowing schedules

Bangalore May 28 With borrowing rates on the ascent and mounting cash surpluses, States are now increasingly beginning to defer their respective borrowing schedules.

Among the States that have opted for curtailing their borrowing requirements for the current fiscal year include Karnataka. High-level State Government officials said that Karnataka's borrowing requirements this year would be considerably less than what has been budgeted. This is because the State is sitting on cash surpluses in excess of Rs 1,500 crore.

Revenue surplus

The officials said that the surpluses were led by buoyant internal revenue receipts and higher than estimated Central transfers. As a result, the State Government is in a position to sustain its revenue expenditure and also earn a small surplus. In fact, this year, it has budgeted for a revenue surplus of Rs 1,600 crore. This sum, the officials said, the State Government hoped to meet part of its capital expenditure requirements. But the reluctance of States to borrow from the financial market also stems from rising rates of state development loans (SDLs). Effective costs have been on the rise for most of the States, the sources said.

Development loans

SDLs are sovereign guaranteed borrowings. These are normally priced at least 25 to 35 basis points above equivalent sovereign borrowing rates. Ten-year gilts are currently priced at 8.17 per cent. As a result, States such as Andhra Pradesh and West Bengal have been forced to raise funds at the rate of 8.4 per cent. Inclusive of underwriting costs, the effective borrowing costs for the funds are expected to slightly over 8.5 per cent. This cost is at least 50 basis points more than the average interest costs during the last financial year.

Interest costs

The increased interest costs, the sources said, had fiscal implications, since it would lead to an escalation in the interest expenditure component in the revenue deficit. Most States, including Karnataka have budgeted for interest costs for the current year only at 8 per cent, inclusive of underwriting fees. Containing interest costs is resorted to in view of the revenue expenditure increases in some of the States on account of wage cost rises, pay commission implementations, enhanced subsidies for power utilities and interest subsidies to farm sectors.

Besides, States also have access to cheaper funds, mostly from small savings. These funds are priced at 8 per cent. Accordingly, they prefer this route for borrowings, as an alternative to SDLs. In fact, since the last two years, more States have preferred this route of funding their capital expenditure requirements despite the shorter maturity profiles. Small savings have maximum maturity of just five years.

Moreover, the officials said that in the event of the small savings route coming under pressure they always had the option of returning to SDLs.

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