Market Borrowings of State Governments increased by 57% in 1st half of 2020-21
Sai Krishna Muthyanolla
November 24, 2020
In its latest ‘Nowcast’ Report, the Reserve Bank of India (RBI) stated that India has entered a technical recession, on the back of contraction in the economy in two successive quarters. It is estimated that India’s GDP contracted by 8.6% in Q2 of  the financial year 2020-21, reflecting the state of Indian economy affected by COVID-19 and the subsequent lockdown measures.
A contraction in the economy implies that there is a fall in the revenue of individuals and businesses, which in turn has an impact on the earnings of the governments – both central and the states. The Centre’s inability to pay GST compensation due to the states, is a result of the fall in expected GST revenues.
Delays in receipt of GST compensation from the Centre puts further strain on revenues of State Governments who have the challenges of their own in managing the fiscal deficit due to the fall in the State’s Own Tax Revenues (SOTR). The Centre has initially proposed that the States borrow from the RBI in lieu of GST compensation, which was opposed by many of the states. One of the reasons is the fact that the States have already been borrowing through various sources to bridge the revenue deficit and did not want to borrow further. Nevertheless, the Central government has recently announced that it would borrow from the RBI on behalf of states.
For many years, the State Governments have been financing their deficits through ‘Market Borrowings’. More recently, a major portion of the Market borrowings were through State Development Loans (SDLs). We have earlier written a story on the borrowings of the States via SDLs and observed a 50% increase in the SDL borrowings by the States during the first four months of the current financial year i.e. 2020-21 compared to the same period last year. This period also coincided with the COVID-19 induced lockdown in the country and the subsequent initial unlock phases. In this story, we take a look at the trends in Market borrowings by state governments during the first six months of the current financial year, which would throw light on the financial burden on the States due to COVID-19 lockdown and its aftermath.
As per the information provided by RBI as part of its Monthly Bulletin for November’ 2020, the combined Gross Market borrowings of all the State Governments during the first half of 2020-21 i.e. April- September’2020 was more than Rs. 3.53 lakh crores. During the same period in 2019-20 i.e. April-September’2019, the combined Market Borrowings of all the State Governments was Rs. 2.25 lakh crores indicating that the market borrowings of the states increased by 57% in 2020-21.
The market borrowings in 2019-20 were Rs. 6.34 lakh crores implying that only 35.5% of the total market borrowings in 2019-20 was during the first six months and a major portion was during the latter half of 2019-20. Data for 2018-19 also indicates that only 33% of the total borrowings in the year was during first six months of 2018-19.
State governments might be staring at a heavy burden of market borrowings in 2020-21 if similar trend continues. It has to be noted that the total borrowings during the first half of 2020-21 is already 57% more than the borrowings during the same period in 2019-20.
In the first complete month after the imposition of lockdown i.e. April 2020, the combined market borrowings of all the State Governments were Rs. 59.2 thousand crores. This is twice the amount of borrowings recorded during the same month in 2019-20 i.e. Rs. 29.57 thousand crores.  In the next month (May 2020), although there was a fall in the borrowings with Rs. 47.95 thousand crores, it was 117% higher compared to the amount in May’2019.
In June 2020 when the first phase of Unlock was implemented, although the volume of borrowings increased compared to the previous month, the difference with same period of 2019-20 was not as much as in May.  During April-June of 2020-21, there was a 61% increase in the combined market borrowings of states compared to the same period in 2019-20.
The same trend continued in the ensuing months, where in a higher amount was borrowed by the states, but the difference with the previous year has not been as much as it was in April & May.  However, in September 2020, the was a substantial increase in the Market borrowings by the State governments with a total of Rs. 83.12 thousand crores borrowed. This amount is 70.5% higher than the market borrowings of the States during September 2019. September 2020 marked an increase in the quantum of borrowings compared to the previous months.
During July to September’2020, the amount borrowed by the states from the market was 38% more than the amount borrowed during the same period in 2019-20.
The deadlock with the Centre regarding GST compensation could have been a factor in States resorting to higher market borrowings in Septmeber’2020.
While there is an increase in the overall market borrowings of the State Governments during April-September’2020 compared to same period of last year, there are variances in the Market borrowings of individual states.
The highest volume of borrowing during the first half of 2020-21 was by Maharashtra with Rs. 48.5 thousand crores. This is more than triple the state’s borrowings during the same period last year where it was Rs. 14.5 thousand crores.
Maharashtra is followed by Tamil Nadu in terms of the volume of Market Borrowings during the first half of 2020-21, with Rs. 48 thousand crores. While the variance with previous year has not been as much as Maharashtra, it is still more than double of last year.
The most significant increase when compared to the Market borrowings of last year during the period of April-September is in case of Karnataka. During the first half of 2019-20, Karnataka State government had Market borrowings to the tune of Rs. 5 thousand crores which increased nearly 6 times with Market borrowings of Rs. 29 thousand crores during the first half of 2020-21.
All these three states are among the worst affected states by COVID-19 infection. Apart from that, these three states are among the leading states in terms of revenue generation and are those which receive a higher GST compensation.
Among the other larger states, Madhya Pradesh and Haryana also have reported more than 60% increase in market borrowings when compared to last year with 83% and 68% respectively. Apart from these, the North Eastern States of Nagaland, Meghalaya and Mizoram also have reported a substantial increase in market borrowings compared to 2019-20 though the absolute amounts are lower. The proportion of increase in the market borrowings of these states during the first half of 2020-21 is higher than the national average.
Among the remaining States, Andhra Pradesh borrowed Rs. 31.2 thousand crores during the first half of 2020-21, a 55% increase compared to that of last year. Although the amount of borrowings is lesser, Uttarakhand, Goa & Odisha are the only other states which borrowed 50% or more than the amount of borrowings during same period last year. These are followed by Telangana, which borrowed Rs. 22.9 thousand crores in the first half of 2020-21 which is 45% more than last year.  Kerala, Rajasthan & Gujarat are among the other larger states which have reported more than a 25% increase in market borrowings during the first half of 2020-21 compared to last year.
Meanwhile, Punjab & Uttar Pradesh are among the larger states which have so far borrowed less during the first half of 2020-21 compared to their market borrowings during same period of last year. Jharkhand is the only state which has not yet resorted to Market borrowings in current financial year.
As indicated earlier, September 2020 recorded the highest total amount of Market Borrowings by the states in this financial year so far. The significant aspect of the numbers for this month is that nearly every state has resorted to Market borrowings, including those who have refrained from or had borrowed less in the months before September.
For few of the larger states including Andhra Pradesh, Bihar, Maharashtra & Karnataka, borrowings in September 2020 form a significant part of their total market borrowings in the current year so far.
While the situation seemed to improve since June 2020, September 2020 presents a reversal of trend. If the overall trend of higher market borrowings during the second half of the financial year continues, we might be looking at an almost 60% increase in the market borrowings of states in 2020-21 compared to 2019-20. This will complicate & weaken the fiscal position of the states. The delay in GST compensation & other dues from the centre may also add to the woes of state governments.
Featured Image: Market Borrowings of State Governments