By CL Jose
THIRUVANANTHAPURAM/March 16-2022: Has a larger-than-expected tax devolution from Centre slowed down Kerala’s market borrowing exercise during the second half (Oct-March)?
Though Kerala has always been reprehended by its detractors, especially the Opposition, for its ‘profligate’ borrowing, the state has turned out to be one of the slowest market borrowers among all Indian states since last October.
[The new financial year is bound to be a challenging one for the finance minister, KN Balagopal, as he has to create a lot of headroom in advance for ‘fresh borrowings’ as the colossal rail project – SilverLine, is expected to be finalised this year, if things work out as envisaged by the government. Over and above the Rs33,700 crore the project has to borrow from overseas, the state has to find large funds for land acquisitions.]
States raise about 60 per cent of their debt by selling state development loans (SDLs) or bonds to the investors, primarily banks and insurance companies, and these papers are zero risk instruments that enjoy implicit guarantee from Central Government.
A close look at the issuance of SDLs by Kerala during 2021-22 (FY22) testifies that the state has borrowed much lower than what was indicated for this period through the auction of SDLs.
The reputed rating agency, ICRA, has pointed out that a sharp step-up in tax devolution from the Centre for the month of February 2022 has contributed to the lower than indicated SDL issuance by many states this time around.
Highest tax devolution in FY22
The Government of India transferred to the states a sizeable Rs1,47,300 crore (Rs1473 billion) as tax devolution in February 2022, the highest monthly release so far in the financial year 2021-22 (FY2022)
The significance of February’s release may be exemplified by the fact that the devolutions in November 2021 and January 2022 were Rs95,100 crore each.
“This is likely to be the chief cause of the large deviation between the indicated aggregate amount of Rs1,29,900 crore and the actual Rs72,800 crore raised by the states through SDL issuance in February,” the agency noted.
In the case of Kerala, the state raised only Rs1000 crore through SDL issue in February against the indicated Rs4500 crore worth issues.
Kerala’s share from the Centre’s tax devolution in February alone stands at Rs2835.53 crore, being 1.925 per cent allocated to the state by the 15th Finance Commission. The Centre distributes or devolves 41 per cent of the taxes and duties it collects during a financial year. This is being opposed by many states arguing that the states deserve a much higher devolution from the Centre.
Overall, in 10 out of the 11 weeks, when SDL auctions were held so far in the fourth quarter (Q4), FY2022, the aggregate amount raised by the states and Union Territories (UTs) has been lower by Rs1 lakh crore compared with the indicated issue size of Rs2.8 lakh crore.
The auction calendar published in advance by the Reserve Bank of India (RBI) for the issue of SDLs has mandated Kerala to borrow Rs9152 crore for the October-December quarter and Rs6408 crore for the January-March quarter.
During the ongoing quarter (January-March), as per the auction calendar, Kerala was supposed to raise Rs1500 crore on January 24, Rs1000 crore on Feb 1, Rs1000 crore on Feb 8, Rs1500 crore on Feb 22, Rs1000 crore on Feb 28 and Rs408 crore on March 22, totalling Rs6408 crore.
But interestingly, the state has given those exercises a miss, except on Feb 28, when it issued SDLs worth Rs1000 crore.
