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State governments have been borrowing more
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Context
The fiscal health and debt management of Indian states vary significantly, despite common constitutional rules on borrowing. The 16th Finance Commission's recommendations will shape state fiscal deficits from 2026-2027 to 2030-31.
Trends in State Borrowing:
- Shift to Market Borrowings: Since 2006-07, states have relied more on market borrowings than loans from the Centre, with borrowings surging to Rs 10.1 trillion in 2023-24.
- Debt Redemption: The stock of state government securities (SGS) outstanding was estimated at Rs 56.5 trillion by March 2024, with significant redemption due between 2025-30, led by states like Uttar Pradesh and Tamil Nadu.
- Tenor Variation: States have shown variation in the tenor of borrowings, with some preferring shorter tenors and others opting for longer-term securities, affecting their rollover risk.
Risks and New Loan Forms:
- Rollover Risk: The weighted average maturity of SGS has increased, reducing near-term rollover risk, with some states borrowing more in longer-tenor segments.
- Pandemic-Induced Loans: New loans from the Centre emerged during the pandemic, including GST compensation loans and 50-year interest-free loans, impacting the overall debt profile.
- Impact on State Resources: The interest-free capex loan scheme from the Centre, which has significantly increased, will influence state resources for capital spending and their market borrowing needs.
Mains Question:
Considering the variations in fiscal outcomes and debt management across Indian states, critically evaluate the effectiveness of market borrowings as a primary source of funding for state governments. How do the pandemic-induced loan schemes influence state-level fiscal policies and debt sustainability?
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