>Debt burden of State Governments remains considerable; however, a back-ended repayment pattern would support liquidity in the medium term (ICRA)

The debt stock1 of Indian States has risen sharply in recent years, following a weakening of their fiscal health since 2008-092. This note discusses the trends regarding the relative debt levels of various States in India, the altered composition of their debt stock and the repayment pattern of the latter, focusing on the State Governments of Andhra Pradesh (AP), Gujarat, Karnataka, Maharashtra, Punjab and Tamil Nadu (TN)—States in which ICRA has rated the debt instruments of a number of Government entities.3


Following the recommendations of the Twelfth Finance Commission (TwFC), the Central Government disintermediated from the borrowings of State Governments from 2005-06 onwards, resulting in a sharp decline in the inflows of loans from the Centre in the subsequent years. Loans from the National Small Savings Fund (NSSF) formed a substantial source of funding between 2003-04 and 2006-07, declining substantially thereafter. As a result, State Governments have increasingly contracted market borrowings in the form of State Development Loans (SDL) from 2007-08 onwards. Consequently, the composition of the debt stock of the States in the ICRA sample has altered considerably between 2004-05 and 2009-10, with a rise in the proportion of SDL, a marginal decline in the proportion of loans from the NSSF and a considerable decline in the share of loans from the Centre.


The long tenure of loans from the NSSF (25 years, with repayment to be made in 20 equal instalments from the sixth year onwards), results in limited redemption pressure. Although SDLs have a shorter tenure of 10 years, given that substantial funds were raised through this source from 2007-08 onwards, the redemption pressure is likely to be relatively low until 2017-18. Hence, the maturity profile is fairly back-ended across the States, which is a positive from the liquidity perspective in the medium term.


ICRA’s expectations regarding the debt levels of the Indian States etc. in the near-to-medium term are as follows:
■ Performance on various leverage indicators is likely to be somewhat inferior to the Budget Estimates (BE) for 2011-12 on account of a modest expansion of tax revenues, which is likely to dampen the growth of overall revenue receipts.

■ Notwithstanding some improvement in certain leverage indicators, Gujarat and Punjab are likely to remain more indebted than the other States in the ICRA sample. Nevertheless, the magnitude of their debt stock at an absolute level is likely to remain smaller than other States, particularly Maharashtra and AP.

■  Given the modest anticipated inflow of funds under the NSSF and the likely moderation in tax revenues in the current fiscal relative to the BE for 2011-12 , issuances of SDLs are likely to remain substantial in February-March 2012.
■  The anticipated easing of policy rates from Q1, 2012-13 onwards would increase the attractiveness of various small savings schemes thus boosting NSSF inflows.
■  However, with the planned reduction in the minimum share of States in the net small savings collections to 50% from 80% at present, the magnitude of funds to be raised by State Governments through SDL is likely to remain large in 2012-13.


Background: Weakening fiscal health since 2008-09 prompted a Sharp Rise in the Debt Stock of the States in the last three years


Following the global economic crisis that set in during 2008-09, the fiscal health of the Indian States deteriorated to an extent in the ensuing period. This was led by a number of factors, including a slowdown in the growth of tax revenues following the economic slowdown that set in during 2008-09; an increase in employee costs in a number of States (with the Sixth Central Pay Commission as well as State Pay Commissions recommending increases in pay and pension); and a rise in food and power subsidies. A widening of the financing gap4 of the States enlarged their borrowing requirements. Accordingly, the debt stock of the Indian States expanded considerably in recent years (refer Chart 1). The debt liabilities expanded at a faster pace in the period between 2008-11 as compared to 2005-08 for all the States in the ICRA sample (in terms of the compounded annual growth rate or CAGR).


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