ICRA has lowered its estimate of gross State Development Loans (SDL) issuance to ₹8.4 lakh crore in FY23 against the earlier estimate of ₹8.9 lakh crore as it expects tax devolution from the Centre to the States to exceed the amount included in the FY23 budget estimate by ₹1.1 lakh crore.
The higher-than-expected tax devolution could compress the actual SDL issuance in the remainder of this fiscal, the credit rating agency said in a report.
Loans raised by State Governments from the market are called SDLs. SDLs are dated securities issued through normal auction, similar to those conducted for dated securities issued by the Central Government.
“The gap between the indicated and the actual SDLs issuance widened to a substantial 82 per cent or ₹50,000 crore in the first five weeks of Q1 (April-June) FY23.
Central tax devolution
“This is likely to have been led by a comfortable cashflow position of the States following the highly back-ended release of the central tax devolution in FY22, with nearly half the funds released in Q4 (January-March) FY22,” Aditi Nayar, Chief Economist; Neetika Shridhar, Assistant Vice-President; and Jaspreet Kaur, Analyst, ICRA, said in the report.
They noted that if the actual SDL issuance in the remaining weeks of Q1 FY23 is in line with the indicated amount, the estimated issuance (₹1.4 lakh crore) would be 29 per cent lower than indicated (₹1.9 lakh crore).
“We estimate tax devolution at a higher ₹9.3 lakh crore in FY23 (₹8.2-lakh crore budget estimate).
“Accordingly, the monthly tax devolution in the coming months of FY23 is likely to impact the size of the SDL issuance, as well as the ways and means advances and overdraft usage by the states/UTs,” the authors of the report said.
Despite the sharply lower supply, the weighted average cost of SDLs rose from 7.17 per cent in Q4 FY22 to 7.34 per cent on May 2, 2022, per the report.
Only four States raise SDLs
The credit rating agency observed that during April 1-May 2 FY23, only Andhra Pradesh (4,400 crore), Maharashtra (4,000 crore), Punjab (2,500 crore) and Haryana (1,500 crore) raised SDLs. Together, they borrowed ₹12,400 crore, about 82 per cent lower than the ₹67,200 crore that as many as 19 states had initially indicated for this period.
On a year-on-year (YoY) basis, the SDL issuance in Q1 FY23 is half of last year’s level, following the higher-than-expected tax devolution by the Government of India (GoI) to the States in Q4 FY22, the report said.
ICRA underscored that it is unclear if the States had submitted their Q1 FY23 auction calendar to the Reserve Bank of India prior to the release of the large devolution of ₹95,100 crore that was split between March 24, 2022, and March 31, 2022.