New debt ceiling norms cloud sovereign borrowing plans

Since 2020-21, as states’ borrowing limits at this budget rate are set to align with their off-budget borrowing, some states that borrowed more in the pandemic-hit years may face resource sourcing challenges, credit rating agency ICRA said on Tuesday .

While ICRA expects states to borrow £8.4bn over 2022-23, with a borrowing limit of 3.5% of GSDP (government gross domestic product), the off-budget debt calculations could result in large adjustments to some states’ effective borrowing space down, even as uncertainty surrounding the Center’s payment of outstanding GST reconciliation fees has upset its borrowing plans.

Noting that while the inclusion of off-budget borrowings taken by government agencies in state governments’ own debt would improve the transparency of a state’s finances, some states have made the change given the “perceived increase” in such borrowing since COVID would be difficult to comply with. 19’s beginning, the agency said. Those facing large cuts in their credit limits on this account would have to scale back their credit schedules and resort to greater avenues to get advances or overdrafts from the Reserve Bank of India.

It is difficult to determine what downward adjustments may be needed to individual sovereign credit limits due to a lack of sufficient data on bad debt and guarantees provided by sovereigns, ICRA noted, adding that states such as Andhra Pradesh, Tamil Nadu and Uttar Pradesh and Telangana had greatly expanded the extension of guarantees to government entities in 2020-21.

The center typically submits the net borrowing limit for each state at the beginning of the fiscal year, and this year it has indicated that all additional off-budget borrowing since 2020-21 will be adjusted from this year’s limit. States were also offered an additional borrowing limit of 0.5% of the GSDP to implement certain energy sector reforms and additional leeway equal to their contributions to the national pension scheme for government employees.

Uncertainty about lending room allocation appears to be reflected in states’ tentative participation in the government development loan auction calendar. On Tuesday, even as government development loan yields soared, Haryana and Punjab borrowed ₹2,000 crore, though they had indicated no plans to participate. In this week’s issuance, Maharashtra and Andhra Pradesh combined raised ₹500 crore more than planned. Eight states that had planned to borrow 6,300 crore didn’t bother to participate.

ICRA economists noted that the timing of revenue streams from the Center for GST Compensation, Tax Devolution and the ₹1 lakh crore loan offered for capital expenditures will be critical as preloading their remittances would increase the likelihood of increased capital expenditures while the back -Ending would end up reducing the loan amount.