With state governments planning to raise as much as Rs 3.5 lakh crore through market borrowings in 2016-17, the Centre is reviewing the scope of its medium-term debt management strategy to ensure that heavy states’ debt issuance do not adversely affect bond market.
In the Union Budget 2016-17, the Central government has estimated its gross market borrowing at Rs 6 lakh crore and net borrowing at Rs 4.2 lakh crore.
The finance ministry, in consultation with the RBI, has released its three-year medium term debt management strategy last December, with the objective of securing the Central government’s funding at all times at a lower cost over the medium and long-term while avoiding excessive risks.
The Centre plans to expand its debt strategy to incorporate the effect of state government loans, government sources said. This is being done to ensure that heavy borrowings of states do not impact the Centre’s bond issuance plan.
States’ borrowing are expected to rise as more states take over their power distribution companies’ debt via the UDAY (Ujwal DISCOM Assurance Yojana) bonds. State governments borrowed nearly Rs 3 lakh crore in 2015-16, as against Rs 2.4 lakh crore in the previous year.
Around Rs 1 lakh crore of UDAY bonds were issued by states last year, mainly in the month of March. In order to ensure that UDAY bonds do not disrupt the bond market, the Reserve Bank of India and the government had allowed private placement of such bonds so that this supply does not enter market.
“We managed the impact of UDAY bonds with regulatory relaxations such as private placement last year. We want to be prepared this year too (to deal with impact of states’ borrowings),” a finance ministry official said.
Increase in states’ borrowing had created anxiety in the bond market with yields hardening towards the end of last year, especially due to issuance of UDAY bonds. Implementation of Seventh Pay Commission’s proposals this year would also pressurise states to borrow more.
Under the UDAY scheme, which was launched in February, the government had asked states to voluntarily take over 50 per cent of the loans of state electricity boards by March 31, 2016 and 75 per cent by the end of March 2017. These taken-over loans will not be counted for the states’ Fiscal Responsibility and Budget Management for 2015-16 and 2016-17.
The states, in turn, will have the facility of a concessional interest rate of about 9 per cent for servicing the loans, as against rates of over 13 per cent that is charged at present on state electricity boards’ outstanding debt.
Addressing a meeting of the state finance secretaries on April 11, Finance Secretary Ratan Watal stressed that one important cause of tight liquidity post October 2015 was too much government securities simultaneously off-loaded by the states to meet their normal borrowing requirements. “Having learnt from this experience, we have now proposed a better coordinated and more evenly spaced borrowing schedule over the fiscal year 2016-17,” Watal had said.