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Further borrowing to bridge shortfall may worsen states’ liabilities-GSDP ratio

It is important to note that three main states that have opposed to the borrowing as proposed by the Centre are those that figure in the list of top 5 states in terms of liabilities-GSDP ratio.

Written by Aanchal Magazine , Sandeep Singh | New Delhi | October 14, 2020 3:30:38 am

Mounting debt levels have been among the government’s major concerns as it refrained from expanding the fiscal space for stimulus to deal with the economic slump in the aftermath of the Covid-19 pandemic.

A closer look at the breakup of the states’ finances reveals that nearly a dozen states had their outstanding liabilities-GSDP (gross state domestic product) ratio over 25 per cent in the year ended March 31, a trend which may worsen with at least 20states set to explore the borrowing route to meet the compensation shortfall under the Goods and Services Tax (GST) regime.

It is important to note that three main states that have opposed to the borrowing as proposed by the Centre are those that figure in the list of top 5 states in terms of liabilities-GSDP ratio. Punjab ranked the worst with 40 per cent liabilities-GSDP ratio in FY20, followed by Himachal Pradesh (35.7 per cent), West Bengal (34.9 per cent), Rajasthan (33.7 per cent) and Uttar Pradesh (33.6 per cent), the data for 21 states/UTs released by the RBI in its Handbook of Statistics on Indian States 2019-20 showed.

It is, however, important to note that the central government has clarified that the borrowing to be done by states will not impact their finances. As per the options detailed by the Centre, Option 1 has a special window for states, coordinated by the Finance Ministry, to borrow the projected shortfall of Rs 1.1 lakh crore only on account of GST implementation — and not the Covid-19 pandemic — and this amount can be fully repaid from the compensation cess fund.

An economist, who did not wish to be named, said that the borrowing will not be treated as states’ debt for any norms prescribed by the Finance Commission, but it will show in the states’ books, as was the case for borrowing for discoms under UDAY scheme or directed borrowing from the Centre for the bonds issued by any public sector enterprise.

The Centre has proposed states to borrow to fund the shortfall — a move that has been opposed by 10 opposition-ruled states — saying that it is not in a position to borrow further as it faces a “very large borrowing requirement this year”. Also, the Centre has stated that any additional borrowing by it will result in a rise in the yields on central government securities (G-secs), which act as a benchmark for state borrowing as well as private sector borrowing, and hence, will raise the borrowing costs for them as well.

On Tuesday, the Finance Ministry granted permission to 20 states to raise Rs 68,825 crore through open market borrowings to bridge the compensation shortfall this fiscal.

While the liabilities-GSDP ratio of some of the main opposing states, including Punjab, West Bengal, Rajasthan and Kerala, is above 30 per cent, economists say that the fresh borrowing to meet compensation shortfall will not impact them as it will not be accounted as additional debt in their books.

“The Centre has stated that while the borrowing will be done by states, both the principal and the interest will be paid from the compensation cess and they will not be required to pay,” said Madan Sabnavis, chief economist at Care Ratings.

He added that since states will not see any impact on their books, he has not been able to figure out the concerns in borrowing.

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