Kerala unlikely to draw down full borrowing entitlement this fiscal

State borrowing so far tops Rs18,000 cr; about 70 pc borrrowing in Q1

THIRUVANANTHAPURAM/December 03-2020: With Tuesday’s (Dec 1) market borrowing of Rs2,000 crore by selling 7-year state development loans (SDLs) at a coupon of 6.22 per cent, Kerala’s market borrowings have topped Rs18,000 crore.

The Centre has allowed states to borrow up to five per cent of the GDP this year, instead of three per cent, in the wake of the economcic slowdown spawn by the COVID 19 onslaught, taking the borrowing limit for Kerala  to more than Rs40,000 crore.

However, Kerala Government under the chief minister, Pinarayi Vijayan, is unlikley to use it up fully as the state is obliged to write back the loans pro rata to the anticipated drop in GSDP in 2020-21, thanks to the COVID 19-induced contraction in economy .

Businessbenchmark.news has arrived at this conclusion from the discusssions it had with several economists as officials or the minister concerned were unavailble for response on this.

Of course, the state gets two years’ time to restore the borrowing so as to adjust to the lost GSDP. More importantly,  the treasury deposits consumed by the state also will be accounted as part of the borrowings of the state though the deferred one-month government employees’ salary will be considered part of next year’s liabailithy.

Notwithstanding the fact that the budget has estimated the GSDP for 2020-21 at about Rs9.78 lakh crore, it is destined to fall substantially from that level and so is the borrowing limit linked to GSDP, and as explained before, the Finance Department has two years’ time to compensate for the borrowing thus rendered surplus due to the contraction in GSDP.

In fact, more than one-third of the total market loans, at Rs5,930 crore, was raised on April 7 alone and 70 per cent of the borrowings as of date, at Rs11,930 crore, have been signed up during the first quarter itself.

Borrowing slowed after Q1

In fact, the state has been going slow since its borrowing splurge during the first quarter ending June 30, and confined its second quarter borrowing to Rs3.500 crore, and Rs2,636 crore so far during the third quarter.

The Reserve Bank of India (RBI), which is organising and monitoring the state’s borrowing programme has earmarked Rs3,500 crore worth borrowing for Kerala.

As per the budget projection, the gross state domestic product (GSDP) was estimated at about Rs9.78 lakh crore (Rs9.78 trillion) and hence the total borrowing and liabilities for 2020-21 had been pegged at Rs29,300 crore and the ‘Internal Borrowings’ at Rs24,490 crore with just over Rs22,000 crore being earmarked as the market borrowing portion for the fiscal.

COVID 19

But the COVID 19 and the steep economic slowdown induced by the pandemic has sent the economy sputtering and all the estimates have gone upside down rendering the government to do the counting once again.

Frontloading of borrowing

The initial plan by the Finance Minister, Dr Thomas Isaac, was to frontload the borrowing, which had reflected in the large borrowing of Rs5930 crore by the state during April, the first month of the financial year.

But the high price demanded by the buyers of Kerala’s SDLs prompted the FM to apply brakes on the borrowing programme. In fact, the state paid coupon in the range of 7.91 per cent to 8.96 per cent to raise Rs5,930 crore in April through SDLs whose tenure ranged between 10 to 15 years.

OMO operations 

With a view to checking the relatively high coupon rates on state borrowing through SDLs, RBI has started open market operations (OMO) in state securities as it has long been doing in Central government securities (G-Secs) and the first such operation went off on October 22 for SDLs worth Rs10,000 crore.

While 30 SDLs were bought by RBI from the secondary market in the operation, Rs55 crore worth SDLs issued by Kerala  (7.91 per cent Kerala SDL 2030), also entered the list. The Kerala SDL with a face value of Rs100 was bought at Rs109.50, thus yielding 6.55 per cent – way below the coupon of 7.91 per cent paid at the primary issue.

Talking to businessbenchmark.news, I Unnikrishnan (seen in the picture – down), an investment expert based in Trichur, said that RBI seeks to suck the excess supply of SDLs through this exercise, and thus stabilise the coupon on state development loans (SDLs) issued in the future.

RBI through the OMO operations seeks to maintain a systemic gap  in the yields between Central Government securities (G-Secs) and state securities (SDLs). The RBI’s OMO has helped states borrow at lower rates from the market  in the past two months since OMO was introduced.

“Earlier, the gap between G-Secs and SDLs or the premium on SDLs  in relation to that of G-Secs, used to hover around 70 to 80 basis points, but this has fallen to 40 to 50 basis points after RBI entered the market with OMO,” noted Vikram Dalal (seen in the picture- up), head of a Mumbai-based Synergee Capital Services.

 

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