State Borrowings
Context:
State governments are preparing for a substantial increase in market borrowings in the fourth quarter of FY25, signaling a potential boost to economic growth.
Key Highlights
- Projected Market Borrowings: Total market borrowings by states in Q4 FY25 are expected to rise by 18% year-on-year, reaching ₹4.73 trillion, compared to ₹4 trillion in Q4 FY24.
- Major contributors to this borrowing surge include West Bengal, Maharashtra, and Karnataka.
Constitutional Provisions
Article 293(1): It grants state governments the power to borrow within India upon the security of their respective Consolidated Fund. This borrowing is subject to limits that may be established by state legislatures through law.
Article 293(3): According to Article 293(3), a state cannot raise any loan without the consent of the Government of India if it has any outstanding loans made to it by the central government or if there are guarantees given by the central government for any loans. This provision ensures that states remain accountable for their debts and prevents excessive borrowing that could jeopardise fiscal stability.
Article 293(4): Under Article 293(4), the Government of India can impose conditions when granting consent for state borrowing. This clause allows the central government to maintain oversight and control over state borrowing practices, ensuring that they align with national fiscal policies.
Article 292: This article pertains to the borrowing powers of the Union government, allowing it to borrow on the security of the Consolidated Fund of India. It sets a precedent for similar structures at the state level.
Fiscal Responsibility and Budget Management (FRBM) Act, 2003: This Act further regulates fiscal discipline among states, emphasising responsible borrowing and financial management.
State-Wise Borrowing Plans
- West Bengal: Plans to borrow ₹58,000 crore, significantly higher than the ₹34,500 crore raised in Q4 FY24.
- Maharashtra: Expected to borrow ₹50,000 crore, in line with the previous year.
- Karnataka: Set to borrow ₹48,000 crore, slightly less than ₹54,000 crore in Q4 FY24.
- Madhya Pradesh: ₹45,000 crore (up from ₹29,500 crore in Q4 FY24).
- Uttar Pradesh: ₹36,000 crore (up from ₹29,000 crore in Q4 FY24).
- Telangana: ₹30,000 crore (more than double the ₹13,750 crore in Q4 FY24).
- Rajasthan: ₹25,000 crore.
- Bihar: ₹15,500 crore.
Economic Implications
- The increased borrowings aim to finance states’ deficits and manage revenue expenses, including salaries, pensions, and subsidies.
- Economists caution that while the borrowing indicates higher capital expenditure, much of it may be allocated to non-growth-oriented revenue expenses.
Context of Economic Slowdown
- India’s GDP growth slowed to 5.4% in Q2 FY25, its lowest in nearly two years, compared to 6.7% in Q1 FY25 and 8.2% in FY24.
- The slowdown is attributed to reduced government spending and weakening urban consumption trends.
- Rating Agency Insights: Rating agency ICRA has observed that actual borrowings by states often fall short of their initial projections.
- This planned borrowing surge reflects the states’ commitment to bolstering their financial capabilities while addressing economic challenges, with a potential ripple effect on India’s broader economic recovery.
