The cost of borrowing for states has gone up even as they plan to tap the market for more funds.
The difference in yield between central and state government securities has more than tripled in as many months, with investors shying away from bonds issued by local governments.
This swelling in the cost of borrowing for state governments comes even as they plan to spend more by tapping the market for funds.
Based on the trading on state government securities last week, for which data are available from Clearing Corporation of India Ltd (CCIL), trades took place at a yield of 8.15 per cent, as compared with 6.35 per cent on the benchmark 10-year central government security. This is a yield difference of 180 basis points (each basis point is a hundredth of a percentage point), compared with 42 basis points on December 1.
“The difference in yield had never crossed 50 basis points,” said Golaka C Nath, senior vice-president of economic research with CCIL. “The spread (between central and state g-secs) was only 100 basis points even 15 days back.”
Under the Debt Consolidation and Relief Facility (DCRF), each state is permitted a fiscal deficit up to 3 per cent of Gross State Domestic Product (GSDP). In addition, for fiscal 2009-10, states have been allowed to borrow an extra 0.5 per cent of GSDP. The relaxation would allow a cumulative additional borrowing of Rs 30,000 crore.
The increase in yield in the secondary market has spilled over to the primary market, too. The previous auction of state government securities, on March 9, had these sold at a 8.16–8.89 per cent yield. Meghalaya’s bond issue was at 8.16 per cent, while its neighbour, Assam, raised money at 8.89 per cent. Issues of state government securities are managed by the Reserve Bank of India (RBI).
The 8.89 per cent rate is higher than what the State Bank of India asks on a home loan for an individual (8.5 per cent).
Offering a different view, a senior RBI official said the difference becomes large when the economy goes through a phase of slow growth, as investors tend to prefer g-secs issued by the Centre because of perceived strength. “When the economy grows at a faster rate, the difference is not seen,” he said.
With a slowing economy, India’s growth rate is expected to drop sharply in the next financial year and economists are predicting record-high fiscal deficits because of lower tax collections and increased social expenditure. This is expected to worsen the fiscal condition of both the states and the Centre, but the risk perception on local governments is higher.
“Any difference over the benchmark 10-year g-sec yield can be attributed to the risk premium attached by investors”, said D K Joshi, economist with Crisil Ltd, a ratings and advisory firm.
