State Debt profile: Tamil Nadu tops with highest outstanding debt

July 26, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

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State Debt profile: Tamil Nadu tops with highest outstanding debt

Subject :Economy

Section: Fiscal Policy

Key Points:

Tamil Nadu has the highest amount of outstanding debt among all States and Union Territories. The State’s outstanding debt stood, as per budget estimates for 2022-23, at ₹7.54-lakh crore followed by Uttar Pradesh at ₹7.10-lakh crore, as per figues presented in the parliament
The outstanding liabilities of Maharashtra, the country’s largest economy measured in terms of Gross State Domestic Product (GSDP), stood at ₹6.80-lakh crore as per budget estimates for 2022-23. It was followed by West Bengal (₹6.08-lakh crore), Rajasthan (₹5.37-lakh crore) and Karnataka (₹5.35-lakh crore). The union territory of Puducherry had the lowest outstanding debt of ₹11,651 crore.
Tamil Nadu has budgeted an outstanding debt ₹7.26-lakh crore for FY24. This constitutes 25.63 per cent of GSDP in 2023-24, well within the 29.1 per cent for limit set by the Fifteenth Finance Commission.
Tamil Nadu topping the list of States with highest debt is not surprising as the State has consistently been the highest market borrower in the last three years.
Market borrowings of States are done through issue of bonds under State Development Loans (SDLs).

State Development Loans

State Development Loans are dated securities issued by states for meeting their market borrowings requirements. Purpose is to meet the budgetary needs of state governments. The higher the fiscal strength of a state, the lower will be the interest rate (yield) it has to pay for the SDL borrowings.
Purpose of issuing State Development Loans is to meet the budgetary needs of state governments. Each state can borrow upto a set limit through State Development Loans.
The SDL securities issued by states are credible collateral for meeting the SLR requirements of banks as well as a collateral for availing liquidity under the RBI’s LAF including the repo.
One remarkable feature of SDL is that it is a market oriented instrument for states to mobilise funds from the open market. Higher the fiscal strength of a state, lower will be the interest rate (yield) it has to pay for the SDL borrowings.
SDLs are basically securities and they are auctioned by the RBI through the e-Kuber which is dedicated electronic auction system for government securities and other instruments. RBI holds SDL auctions once in a fortnight.
The rate of interest or yield of SDL securities are determined through auction. Still the interest rate will be slightly higher than that of Central Government securities (G-secs) of matching tenure.
The investors in SDL are basically commercial banks, mutual funds, insurance companies who are attracted by the slightly higher interest rate of SDL (compared to central government securities).