• UGI USER
  • Aug 01, 2024
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RISING STATE BORROWINGS AND ASSOCIATED RISKS

Why in the News?

  • State governments in India are borrowing more, raising concerns about rollover risks. This is due to the significant increase in market borrowings to fund the gap between revenues and expenditures.
  • The 16th Finance Commission’s recommendations will guide state fiscal deficits from 2026-2027 to 2030-2031, with an assumption that the state fiscal deficit will be pegged at 3% of GDP over the medium term.
Source: BS

Data of Market Borrowings

  • Market borrowings by states surged to ₹101 trillion in 2023-24 from ₹4.8 trillion in 2018-19.
  • State-government securities (SGS) rose to ₹56.5 trillion by March 2024, equivalent to 55% of Government of India securities.
  • Uttar Pradesh, Tamil Nadu, Maharashtra, Karnataka, and Gujarat will lead market borrowings, ensuring high issuance in the next decade.

Managing Rollover Risks

  • Rollover risk, the risk of refinancing debt, is a key concern for state borrowings.
  • The weighted average maturity of SGS increased to 8.5 years by March 2024, reducing near-term rollover requirements.
  • In 2023-24, Andhra Pradesh, Karnataka, and Telangana borrowed in longer tenors, while Gujarat and Chhattisgarh chose shorter tenors.
  • New loans from the Centre, including GST compensation loans and 50-year interest-free loans, have influenced the borrowing landscape.
Government Borrowing

  • Government borrowing is a loan taken by the government, classified as capital receipts in the Budget document.
  • Borrowing is typically done through the issuance of government securities (G-secs) and Treasury Bills.

Government Securities (G-Secs)

  • G-Secs are debt instruments issued by the government to finance its fiscal deficit.
  • They have longer maturities, typically ranging from 5 to 30 years.
  • G-Secs pay periodic interest and return the principal amount at maturity.

Treasury Bills (T-Bills)

  • T-Bills are short-term debt instruments issued by the government to meet short-term liquidity needs.
  • They have maturities of less than one year, typically 91 days, 182 days, or 364 days.
  • T-Bills are issued at a discount to face value and redeemed at par, with the difference representing the interest earned.

Associated Article:

https://universalinstitutions.com/sixteenth-finance-commission-establishes-advisory-panel-for-broadened-scope/#:~:text=About%2016th%20Finance%20Commission%3A,between%20the%20Centre%20and%20States.