Market Borrowing by States

• Context (IE): States and union territories are scheduled to borrow a whopping Rs 4.1 trillion during January-March. This will widen the yield between the state governments’ loans and G-sec.
• This indicates a growing disparity in borrowing costs between states and the central government. Consequently, states may have to spend more to raise funds compared to the Centre.

Bond yield It is a measure of the return an investor can expect to receive from a bond investment. The relationship between bond yield and bond prices is inverse. In other words, as bond yields increase, bond prices decrease, and vice versa.

Financial Resources of the State

Revenue receipts

• It consists of
  • Tax revenue
  • Non-tax revenue
  • State’s share of Union taxes and duties
  • Grants-in-aid from the Government of India (GoI).

Capital receipts

• It comprises of miscellaneous capital receipts such as
  • Proceeds from disinvestments
  • Recoveries of loans and advances
  • Debt receipts from internal sources (market loans, borrowings from financial institutions/commercial banks)
  • Loans and advances from GoI. E.g, ‘Special Assistance to States for Capital Investment 2023-24’ scheme.
• Both revenue and capital receipts form part of the Consolidated Fund of the State.

Net Public Account receipts

• There are receipts and disbursements in respect of certain transactions such as
  • Small savings
  • Provident funds
  • Reserve funds
  • Deposits,
  • Remittances etc.
• It does not form part of the Consolidated Fund.
• These are kept in the Public Account set up under Article 266(2) of the Constitution and are not subject to vote by the State Legislature.

Reasons for increased borrowing by states

• Unforeseen Expenditures: Unexpected events such as natural disasters, public health emergencies, or security-related issues may force states to incur additional expenditures.
  • For example, The Pandemic, High DISCOMs Losses etc.,
• Revenue Shortfall: As a result, from various factors such as economic downturns, disruptions in economic activities, or suboptimal tax collection. States like Madhya Pradesh, Punjab and Kerala fall under this category.
• Economic Challenges: Such as high unemployment rates, low industrial growth, and sluggish agricultural performance can lead to a decreased revenue generation.
• High Revenue Expenditure: This can limit the available funds for other essential expenditures, leading to additional borrowing to meet those needs.
  • Revenue Expenditure: The part of government spending that does not result in the production of assets. Salaries, wages, pensions, subsidies, and interest payments are all instances of revenue expenditures.
• Fiscal Deficit: States with high fiscal deficits may resort to borrowing to cover the gap between their revenue and expenditure.
• Freebie Culture: Political parties promising free electricity and water, laptops, cycles etc. to attract votes during elections put a significant strain on the fiscal position of State governments.
• Infrastructure Development: Many states borrow to fund ambitious infrastructure projects, such as roads, bridges, and public utilities.
• Declining Grants from the Centre
  • For example, GST Cess discontinuation since June 2022 and Reduction in 15th Finance Commission Grants.

Capex loan scheme- Special Assistance to States for Capital Investment 2023-24 scheme About Capex loan scheme It is a central government initiative designed to provide financial support to states in India for their capital Expenditure. It was first instituted by the Ministry of Finance in 2020-21 in the wake of Covid-19 Pandemic. The scheme offers financial assistance in the form of loans to states up to an overall sum of Rs. 1.3 lakh crore during the financial year 2023-24. These loans are interest-free and have a long tenure of 50 years. It is allocated to 16 states (not all). They are Arunachal Pradesh, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Mizoram, Odisha, Rajasthan, Sikkim, Tamil Nadu, Telangana, and West Bengal. Objective Stimulate demand, create jobs, and have a multiplier effect on the economy. Accelerate projects in key sectors such as Jal Jeevan Mission and Pradhan Mantri Gram Sadak Yojana. Encourage reforms in urban planning and urban finance for improved quality of life and governance in cities. Parts of the scheme The scheme has eight parts. Part-I: it is the largest with allocation of Rs. 1 lakh crore. It is allocated amongst States in proportion to their share of central taxes & duties as per the award of the 15th Finance Commission. Part–II: Rs. 3,000 crores have been set aside for providing incentives to States for scrapping of State Government vehicles and ambulances, etc Part–III & IV: Aims at providing incentives to States for reforms in Urban Planning and Urban Finance. Part-V: Aims at increasing the housing stock for the police personnel and their families within the police stations in urban areas. Part-VI: Aims to promote national integration, Make in India and One District, One Product (ODOP) through construction of Unity Mall in each State. Part-VII: Provides financial assistance to States for setting up libraries with digital infrastructure at Panchayat and Ward level. What is Capital Expenditure? It is the money spent on the acquisition of assets such as buildings, land, machinery, and equipment, as well as stock investments. It is an expense that creates permanent assets and yields regular income for the government.