States rely more on market borrowing

RBI finds a shift in the composition of States' outstanding liabilities With market borrowings becoming a predominant instrument of financing the fiscal deficit of the States, the Reserve Bank of India (RBI) is readying to face ‘progressively new challenges'. Giving a broad hint to this effect, a study on ‘State Finances' by the Reserve Bank said that this would necessitate the apex bank “to sensitise the States to build cushions for timely repayments of their future liabilities as also for unforeseen contingences, which would be essential to maintain the confidence of investors in State Government securities in a market-driven system.” In the wake of their continued emphasis on market borrowings to fund gross fiscal deficit, the study found a definite shift in the composition of States' outstanding liabilities. The share of market loans in outstanding liabilities of the States is expected to be around 37.1 per cent at the end of March 2012. It was 27.3 per cent in March 2009, 31.3 per cent in March 2010 and 33.5 per cent in March 2011. On the other hand, the share of National Small Savings Fund (NSSF) in outstanding liabilities has been on the decline since March 2008 (at 32.4 per cent) and is expected to be around 25.5 per cent by the end of March 2012. The decline in the share of NSSF is in line with the recommendations of the Shyamala Gopinath committee, which had suggested a reduction in the mandatory share of State governments in the collection of small savings under NSSF from 80 per cent to 50 per cent. The idea is to “equalise the burden shared by the Centre and the States, as the interest rates on borrowings from the NSSF are higher than the market rates.” The apex bank manages the borrowing programmes of the States. Since 2005-06, the entire market borrowings of the State governments have been raised by way of issuance of 10-year securities that are mostly subscribed by banks and financial institutions. An interest rate profile of outstanding stocks of state development loans (SDLs) shows that the share of high-cost market loans (interest rate of 10 per cent and above) has declined from 4.7 per cent at the end of March 2010 to 1.5 per cent at the end of March 2011. The share of loans with interest rates below 8 per cent, which constituted over half of the total outstanding stocks at the end of March 2010, has come down to around 43 per cent at the end of March 2011. The share of outstanding SDLs with interest rates ranging between 8 per cent and 10 per cent, however, has increased sharply from 44.8 per cent at the end of March 2010 to 55.5 per cent at the end of March 2011, indicating that the incremental debt has been raised at a somewhat higher cost in 2010-11. In view of the increase in the size as also the frequency of the borrowings by the State Governments, the RBI had to take proactive measures to manage the borrowing programme to contain excessive pressure on interest rates. Keywords: Reserve Bank of India, State Finances