Centre must step up cash flows to the states

Source: Indian Express

Synopsis: Borrowing by states via state development loans has been low in the first quarter of the present financial year. Reasons are discussed.

State Development Loans (SDLs)

A predominant source for state governments to raise money to finance their fiscal deficit is via SDLs or bonds. RBI facilitates the auctioning of SDLs.

• SDLs are dated securities issued by various state governments (Security is just a piece of paper in which the borrower promises to repay the amount with or without interest. Bonds, g-secs, shares, etc. are all types of securities)

Lower issuance of SDLs

In the first quarter (Apr – May – June) of the current financial year, the gross issuance of bonds stood at Rs 1.4 trillion.

• This amount is 14% lower than the bonds issued last year (Rs 1.7 trillion) when state governments’ cash flows had undergone a sharp disruption during the nationwide lockdown.
• This is also around 20% lower than what states had initially indicated they would borrow (Rs 1.8 trillion)

Lower bond issuance means state governments have sought lesser money via the SDL route, despite the economic slowdown due to COVID. But, why? Read on to find out.

Why state borrowings have been lower?

Lower state borrowings were a consequence of three major factors which boosted state governments’ cash inflows.

• Additional tax devolution by the Centre: First, an additional tax devolution of Rs 450 billion from the Centre in late March. This amount was in excess of the Rs 5.5 trillion tax devolution that had been included in the revised estimates for 2020-21, presented during the budget in February.
• Record-high GST collections: Second, record-high GST collections in April. The amount that the states received through state GST and their upfront share of integrated GST doubled to Rs 1.3 trillion in the first quarter of this year, up from Rs 0.6 trillion in the same period last year.
• Grants from the Centre: Third, receipt of substantial grants from the Centre adding up to Rs 436 billion in April-May related to the recommendations of the Fifteenth Finance Commission.

Thus, gross bond issuances in April-May 2021 were Rs 476 billion lower than indicated. However, the situation reversed in June 2021, with the issuance being 20% higher than the indicated amount. This increase may reflect some emerging stress in the states’ revenue collections in June, as widening state-level restrictions in May curtailed economic activity.