State finances improve with falling borrowing cost: CARE

Finances of states, which like the Centre borrow heavily from the market, are likely to improve going forward due to falling borrowing costs, which have come down by upto 28 bps since the beginning of the fiscal, says a report by CARE Ratings. States' average borrowing cost rose from 8.07 percent in April to 8.23 percent in May, which further jumped to 8.31 percent in July. But August and September saw a decline to 8.28 percent and 8.20 percent respectively, indicating a downward movement which may continue with the RBI lowering rates further in September, the report noted.

State development loans (SDLs) are debt issued by states to fund their fiscal deficit. Like the Centre, the states too run huge budgets deficits, which are financed mainly through market borrowings via SDLs. But unlike Centre's G-secs and T-bills, SDLs do not have defined issuance calendars.

RBI policy rates tend to get translated faster in the G-sec market, including that for SDLs, relative to even the corporate debt market. Total amount borrowed by states rose in May, July and September but declined in June and August, Care said, quoting RBI data. Also, there has been a variation in the rates at which states borrowed, with a difference of 28 bps between the highest and lowest average cost of borrowing.

Between April and September, 27 states together raised Rs 1,08,185 crore, led by Maharashtra (12.9 percent). It is followed by Tamil Nadu (10.4 percent), UP (10.2 percent), West Bengal (7.9 percent), Telangana (7.6 percent), Haryana (7.2 percent), Kerala (7.1 percent), Andhra Pradesh (5.9 percent), MP and Punjab (5.5 percent each) Gujarat (5 percent), Rajasthan (4.2 percent), Bihar (1.8 percent), Uttarakhand (1.6 percent), J&K (1.3 percent), Himachal Pradesh (1.2 percent), Jharkhand and Assam (0.9 percent each), Goa and Chhattisgarh (0.6 percent each) and others (1.6 percent). Just three states -- Maharashtra, Tamil Nadu and UP -- accounted for more than 33 percent in the total SDLs in the first half of the year.

Assam tops the list of lowest borrowing cost with just 8.06 percent, followed by Arunachal and Himachal at 8.074 percent and 8.15 percent respectively, while Arunachal, Himachal, while Puducherry at 8.335 percent have the highest borrowing cost, followed by Tripura and Chhattisgarh. Except Gujarat and UP, all other states with low borrowing cost also have a share of under 2 percent in the total borrowing.