dan Sabnavis
An issue which has been raised often is whether or not all states should be able to raise
loans at the same rate for balancing their budgets. As all state development loans (SDLs)
are considered to be sovereign debt which also qualifies as SLR securities, the level of
governance of finances does not really matter.
The states which end up borrowing at the lowest weighted average cost are those which
have borrowed more when yields were down and not because the market favoured them.
The states with better finances rightly argue that their debt would be rewarded by the
market in case differential pricing was possible.
State governments run different kinds of budgets. While some are fiscally astute, others
tend to be more flexible in their ways. Similarly, the quality of the budget can vary with
some focusing on capex and other productive expenditures such as education, health,
agriculture, etc, while others may prefer to allocate more on subsidies based on political
motivations.
The reason this does not matter today is because there is sovereign guarantee on all loans taken.
Therefore, there is a case for distinguishing the quality of debt of any state government based on the evaluation of the finances which
addresses the question of whether or not the state has the wherewithal to service its debt if not backed by the concept of soverign ‘fact, even the withdrawal of the SLR status can bring about a difference in which debt of two states are viewed.
Another argument in support of this idea is that while municipals are also a part of the federal structure at the tertiary level, their debt
does not enjoy ‘government’ status. Urban local bodies (ULBs) do the same work as the central and state governments in terms of
development and also have the power to raise taxes and other fees as laid down by the Constitution. They also get transfers from the
Union and state governments for carrying out their tasks. Yet municipal debt is not guaranteed by states or the Union government and
carries credit risk just like a corporate. Given their weak finances, they are unable to borrow from the market which, in turn, has come in
the way of developing a municipal bond market. This being the case, there is a strong argument for removing sovereign status of state
debt.
However, on the other side, this may not be feasible. First, there is already a large quantum of outstanding debt of states of the order of Rs 23 lakh crore, which will have to get re-rated once they are evaluated on a different scale. Second, various state governments incur expenditures which are also being done by the Centre — such as subsidies and waivers. Hence, ideologically what is good for the Centre cannot be bad for states. Third, some states account for the bulk of production of specific farm products which are subsidised. Withdrawal of such subsidies would mean that the entire country would get affected through supplies or prices which are not a good sign. Fourth, suppose a state is not well rated and finds few buyers for the paper, then the Budget would get into a tizzy. Fifth, there are already in place FRBM rules concerning revenue deficit, fiscal deficit and debt levels for various states. As long as they are being adhered to, there should not be any concern. Can we really say that a state that continuously run a fiscal deficit of say 2% with less expenditure be better than one which touches 3% on a regular basis? Sixth, with GST in place, the scope to introduce new taxes or increase tax rates is virtually ruled out. Hence, under these conditions, would it be right to put conditions when there is no control over revenue? Last, the market does not get to reprice the central government debt howsoever large it may be (which is driven by liquidity conditions and accommodation made by the RBI). Therefore, asking the states to pay now differential rates which are already higher by 50-60 bps would not be right. The point to be made here is that governments are not corporate bodies as their goal is to bring about development and, for this to happen, they do undertake several expenses which may not be commercially judicious. Therefore, within this thought process, FRBM rules appear to be the best solution where states are forced to operate within these limits. The time is not yet suitable for bringing in the concept of differential pricing.
However, on the other side, this may not be feasible. First, there is already a large quantum of outstanding debt of states of the order of Rs 23 lakh crore, which will have to get re-rated once they are evaluated on a different scale. Second, various state governments incur expenditures which are also being done by the Centre — such as subsidies and waivers. Hence, ideologically what is good for the Centre cannot be bad for states. Third, some states account for the bulk of production of specific farm products which are subsidised. Withdrawal of such subsidies would mean that the entire country would get affected through supplies or prices which are not a good sign. Fourth, suppose a state is not well rated and finds few buyers for the paper, then the Budget would get into a tizzy. Fifth, there are already in place FRBM rules concerning revenue deficit, fiscal deficit and debt levels for various states. As long as they are being adhered to, there should not be any concern. Can we really say that a state that continuously run a fiscal deficit of say 2% with less expenditure be better than one which touches 3% on a regular basis? Sixth, with GST in place, the scope to introduce new taxes or increase tax rates is virtually ruled out. Hence, under these conditions, would it be right to put conditions when there is no control over revenue? Last, the market does not get to reprice the central government debt howsoever large it may be (which is driven by liquidity conditions and accommodation made by the RBI). Therefore, asking the states to pay now differential rates which are already higher by 50-60 bps would not be right. The point to be made here is that governments are not corporate bodies as their goal is to bring about development and, for this to happen, they do undertake several expenses which may not be commercially judicious. Therefore, within this thought process, FRBM rules appear to be the best solution where states are forced to operate within these limits. The time is not yet suitable for bringing in the concept of differential pricing.
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