Fiscal decentralization by the central government is expected to exceed the budget estimate by at least Rs 1.1 lakh crore in 2022-23, resulting in a compression of gross borrowing by states to Rs 8.4 lakh crore, according to a report on Monday.
However, the cost of borrowing for states fell from 7.17% in the fourth quarter of 2021-2022 to 7.34% on May 2 of this fiscal year, according to an analysis by ICRA Ratings.
Central fiscal decentralization is expected to increase from Rs 9.3 lakh crore in 2022-23 to Rs 8.8 lakh crore in 2021-22 and from Rs 8.2 lakh crore estimated in the 2022-23 budget. The 2021-2022 decentralization was higher than the revised estimate of Rs 7.4 lakh crore and 2.8% lower at Rs 8.1 lakh crore, said Aditi Nayar, the agency’s chief economist.
In the first five weeks of the first quarter of this financial year, states borrowed 82% less than indicated in the borrowing schedule, at only Rs 12,400 crore compared to Rs 67,200 crore initially indicated by 19 States, following higher than expected rates. devolution in the fourth quarter of 2021-22 at Rs 95,100 crore on March 24 and 31, she said.
The agency had estimated net and gross issuance of SDL (state development loan) in 2022-23 at Rs 6.6 lakh crore and Rs 8.9 lakh crore, respectively last month. But taking into account the actual issuance, which is 82% lower than indicated so far, he estimates the gross issuance at Rs 8.4 lakh crore, and taking into account expected redemptions of Rs 2.4 lakh crore in this financial year, net issuance is likely to be Rs 6 lakh crore, up just 21.9 lakh crore from Rs 4.9 lakh crore in 2021-22.
The pattern of monthly fiscal decentralization publications and the timing of GST compensation payment for the December and March quarters for 2021-2022 and the first quarter of the current fiscal year will not only impact the issuance from SDL, but also on demand for Ways and Means Advances (WMA) and Overdraft (OD) in 2022-23, the report notes.
The spread between SDL’s indicated and actual issuance widened to 82% or Rs 50,000 crore in the first five weeks of the first quarter, helped by states’ comfortable cash position following the very late release central taxes in 2021-22, with almost half of the funds released in the fourth quarter of 2021-22.
“As a result, we expect fiscal decentralization in FY23 to exceed the budget estimate by Rs 1.1 lakh crore, bringing gross issuance down to Rs 8.4 lakh crore this year,” said Mrs Nayer.
During April 1 and May 2, only Andhra (Rs 4,400 crore), Maharashtra (Rs 4,000 crore), Punjab (Rs 2,500 crore) and Haryana (Rs 1,500 crore) issued debt securities. Together they borrowed Rs 12,400 crore, up to 82% less than the Rs 67,200 crore originally quoted by 19 states for this period.
On an annualized basis, debt sales so far this fiscal year are 49% of last year’s level as the Center granted higher-than-expected fiscal decentralization to states in the fourth quarter of 2021-22.
However, despite the sharp drop in supply, the weighted average cost to states fell from 7.17% in the fourth quarter of 2021-2022 to 7.34% on May 2.
It estimates that central fiscal decentralization will reach Rs 9.3 lakh crore in 2022-23, from Rs 8.8 lakh crore in 2021-22, and therefore, monthly fiscal decentralization in the coming months is likely to have a impact on the size of SDL broadcasts, as well as WMA and OD prints.
Thus, gross issuance of SDL is expected to be printed at Rs 8.4 lakh crore in 2022-2023, or Rs 1.4 lakh crore or 29% less than stated for the full year.
The Center disbursed Rs 8.8 lakh crore to the states in 2021-22, compared to Rs 7.4 lakh crore in 2020-21 and over Rs 6.7 lakh crore budgeted for the year. Almost half of the Rs 8.8 lakh crore in 2021-22 was released in the fourth quarter. After posting Rs 2.4 lakh crore in February 2022, it posted Rs 95,100 crore at the end of March.