The Covid-19 pandemic and the resultant lockdown have severely impacted the financial health of both Union and State Governments due to sharply lower tax receipts and higher spending on social schemes announced by the government. A study undertaken by Acuité Ratings reveals that the pressures on the consolidated fiscal position is not only reflected in increasing market borrowings but also a sharp rise in ways and means advances (WMA) both at the federal and the state level, a phenomenon rarely seen in recent years.

The fiscal position in Q1 FY21 has surely been a matter of concern for both the government and RBI, given the slow pace of the economic revival amidst intermittent lockdowns. While the revenue-expenditure gap is typically higher in the first half of the year for the central government, the total revenue receipts at 54% of the previous year’s levels in the first quarter (April-June) clearly reflects the sharp impact of lockdown and economic contraction. The fiscal deficit at end of June already stood at Rs. 6.62 Lakh Cr i.e. more than 2 Lakh Cr than the deficit seen a year back. While the government has raised excise duties on fuel (which offset the decline in crude oil prices) and also plans to impose higher custom duties on specific imports, it is unlikely to improve the fiscal deficit given the slow revival in demand and consumption.

We observe that shortfall of revenue collection due to persistent lockdown has caused the government to rely on higher than average market borrowings. Consequently, monthly market borrowings of the central government have exceeded Rs. 1 Lakh Cr during the months of May and June. On a YTD basis, market borrowings average Rs. 0.95 Lakh Cr in the current financial year as compared to Rs. 0.68 Lakh Cr and Rs. 0.45 Lakh Cr in FY19 and FY20, respectively. While the government has already revised the borrowing targets from the budgeted figures by around 50% in the current fiscal to Rs. 12 lakh Cr, it may prove to be inadequate.

On the other hand, the fiscal condition of the states has also shown signs of a deterioration with their average monthly market borrowings having almost doubled compared to same time last year. With the relentless virulence of the Covid pandemic and a precipitous decline in state’s own tax revenues along with lower tax devolution from the central government, a significantly higher expenditure on healthcare is taking its toll on state government coffers. The market borrowing programme of the states has been particularly active, growing by almost 96% in the first four months of the fiscal FY21 as compared to the April-July period of the previous year. With a monthly average of Rs. 0.58 Lakh Cr (taking only the first two weeks of July till which data is available), states borrowed Rs. 0.29 Lakh Cr more as compared to the borrowings till July end in FY20.

Apart from market borrowings, the overall WMA utilisation by the states also reflect the stress in their fiscal position. The average WMA utilisation which had already seen an increase by 51% in the April-July period of the previous year increased further by 39% in the current year. While the WMA utilization was modest at around Rs. 1200 Cr during April, it went up sharply to Rs. 6000 Cr and above in the next 3 months. The non-special category states that are utilizing WMA in a significant manner are Andhra Pradesh, Kerala and Telangana. In our opinion, states such as Punjab, West Bengal, Uttar Pradesh, Odisha, Haryana and Rajasthan are likely to resort to this facility in the near term as the lockdown continues to impact revenue flows. The market borrowings of Uttar Pradesh and Odisha, in particular has already exceeded 90% of overall debt issuance in FY20 and these states may need to utilize the WMA window extensively to manage their liquidity position in the current fiscal.

It is known that RBI has extended the WMA limit by an aggregate 60% for the first half of FY21. Generally, RBI issues WMA for 90 days at the prevailing repo rate. If the WMA outstanding exceeds 90 days, it is treated as over draft and bears an interest rate of 200 bps over the existing repo rate. In this context, it is worth mentioning that Kerala has been availing the over draft, reflecting its relatively weak funds position vis-à-vis the other peer states. We note here that Covid-19 has significantly impacted the state’s economy which depends on tourism and inward remittances, both of which have seen a severe disruption.

Interestingly, the states which are in a relatively better fiscal position have also increased the utilisation of WMA, given that the cost of such borrowings is significantly less than that of state development loans. Further, such intra-year borrowings are also not part of the FRBM act. Telangana is a case in point; the state has been availing the WMA facility extensively despite a better fiscal position with fiscal deficit in FY20 being at 2.5% of GSDP, 50 bps lower than the FRBM limit.

While states have already been strong borrowers under the facility, what surprised us was the spike in WMA drawals by the central government in the first two months of the year, touching Rs 1.3 lakh Cr at end of May as compared to nil borrowings under the facility same time last year. While the WMA utilisation has come down subsequently in June and July and has been replaced with fresh market borrowings, on a YTD basis, the central government’s utilisation of ways and means advances (WMA) increased by 146.8% in the current financial year as compared to a contraction of 4.3% in the same period last year.

It is indeed apparent that WMA has emerged as an important avenue for short term finance for both the states and the central government in the current scenario marked by sudden drop in revenue receipts and rise in non-discretionary expenditure. It is plausible that the sudden need for resources towards healthcare and cash pay-outs during the outbreak of the pandemic has also led to the governments resorting to the WMA route in the first 2-3 months. However, many states have continued to draw significantly from WMA despite the simultaneous step up in fresh borrowings since it a much lower cost facility and the limits have been increased significantly, thereby providing an opportunity to lower interest costs in a challenging scenario.

Table 1: Market borrowings and WMA of Central Government (Amount in ₹Cr)

Table 2: Market borrowings and WMA of State Governments (Amount in ₹Cr)

Source: RBI, Acuité Research; *Acuité estimate # First Two Weeks