4 May 2022 , 12:35 PM
These borrowings have been raised by entities owned by states, which also guarantee the loans. Around 4-5% of the revenue of states will go towards servicing such guarantee obligations this fiscal, partially reducing the ability of state governments to fund capital expenditure (capex).
The reasons for the rise in off-balance-sheet borrowings are two-fold. One, constrained revenue growth due to the pandemic-induced slowdown and increasing revenue expenditure have led to their fiscal deficits rising to close to 4% of GSDP, well above the historical level of 2-3% seen for most part of the last decade. This has reduced the wherewithal of states to directly fund the entities they own.
Two, even if states wanted to do so by borrowing more, they can’t without the explicit approval of, and beyond the limits set by, the central government. But states don’t need prior central consent to guarantee the loans and advances, and bonds issued by its entities. Also, the ceiling on guarantees is self-determined and varies by state. All these have led to greater reliance on off-balance-sheet borrowings.
Says Aditya Jhaver, Director, CRISIL Ratings, “We believe cash-flow support will be required for 50-55% of the outstanding guarantees, and that 4-5% of the annual revenue of states will be consumed for servicing these obligations this fiscal2 . This is more than double of the mark seen 4-5 years back and hence will partly constrain their flexibility to fund capex in the near future.”
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