States’ borrowings via SDL stay low in April as Centre opens interest-free loan spigot

States’ borrowings via SDL stay low in April as Centre opens interest-free loan spigot

Fundraising by states through state development loans (SDL) has remained lower in April, so far, than the budgeted amount due to heavy borrowings in March and the availability of interest-free loans from the Centre.

SDL is a bond issued by state governments to fund their fiscal deficits.

Dealers said the lower fundraising is witnessed after heavy borrowing by states in March and interest-free loans announced by the government in the Union Budget 2023-24.

“The central government continues to extend the 50-year interest-free loan facility to states for one more year. Hence, states tend to borrow less through SDL during the first few months of the financial year,” said Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincorp.

Further, the majority of the states borrowed heavily in March, he said.

“We are seeing this trend for the last 2-3 years, the state governments borrow less than the calendar amount because of less state spending and huge tax collections,” said Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a New Delhi-based fund house.

What does RBI data say?

In the three SDL auctions so far in April, states were estimated to raise Rs 39,300 crore but ended up raising just Rs 16,300 crore, according to the Reserve Bank of India (RBI) data. The fundraising in April has been around 41 percent of the budgeted amount.

They raised Rs 3,000 crore on April 5, Rs 5,800 crore on April 11 and Rs 7,500 crore on April 18.

In March, the budgeted amount to be raised by the states was Rs 1.10 lakh crore, and they ended up raising Rs 1.4 lakh crore in four auctions.

Dealers say the absence of government securities auctions helped states to borrow more funds in the last month of the last financial year.

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Interest-free loans

In the Union Budget 2023-24, Finance Minister Nirmala Sitharaman announced the extension of 50-year interest-free loans to the state governments by a year.

“I have decided to continue the 50-year interest-free loans to state governments for one more year to spur investment in infrastructure and to incentivise them for complementary policy actions,” she said during the Budget speech.

Further, she said the entire 50-year loan to states has to be spent on capital expenditure within 2023-24.

“Most of this will be at the discretion of states but a part will be conditional on states increasing their actual capital expenditure,” the finance minister said.

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The outlook

Dealers say that states are likely to raise a lower amount than the budgeted amount in the next few months as their spending is less initially and may utilise the interest-free loans.

“Most of the states may try and utilise the interest-free loan first to undertake capital work,” Srinivasan said.

Tulsyan said in the first two quarters the states’ spending is less and according to the trend, states increase their spending in the second half of the year.

“Issuances will definitely be less than the calendar amount for the next two quarters,” Tulsyan said.

Money-market dealers said lower issuances by state governments will also aid state and central governments in managing yield movement in the primary and secondary markets.

Moreover, dealers said yields will mostly remain in the current range.

This is because after the pause by the RBI in April monetary policy, yields on the government securities have eased and since then traded in a narrow range.

Currently, the yield on the 10-year SDL in the auction was in the range of 7.56-7.59 percent whereas the yield on the 10-year benchmark bond 7.26 percent 2032 traded at 7.2285 percent.