The state government finances in India are poised for significant changes in FY2025, according to a recent Icra report. The Reserve Bank of India (RBI) projects a gross issuance of State Government Securities (SGS) at Rs 2.6 trillion for Q2 FY2025, marking a 38.5 per cent year-on-year increase. This surge is driven by major states such as Maharashtra, West Bengal, Gujarat and Karnataka.
In line with the Q1 FY2025 auction calendar, Maharashtra has indicated the highest amount of gross issuance at Rs 550 billion in Q2 FY2025. This is Rs 410 billion higher than the amount borrowed in Q2 FY2024 (Rs 140 billion). West Bengal (WB), Gujarat, and Karnataka have also indicated their borrowing amounts for Q2 FY2025 at Rs 230 billion, Rs 130 billion, and Rs 100 billion, respectively.
This implies incremental borrowings of Rs 105 billion each for WB and Gujarat, and Rs 100 billion for Karnataka compared to Q2 FY2024. The combined incremental borrowing of Maharashtra, WB, Gujarat, and Karnataka is indicated at Rs 720 billion, comprising nearly 98 per cent of the total increase of Rs 732 billion from Q2 FY2024.
These figures underscore the significant increase in borrowing by these states, reflecting their strategies to manage their financial requirements and fund development projects amidst evolving economic conditions.
A notable development expected in the upcoming FY2025 Union Budget is an upward revision in tax devolution to states. In April to May 2024, Rs 699 billion was released, with higher monthly allocations anticipated for the remainder of the fiscal year. This increased cash flow is expected to enhance the state's financial health and reduce its dependence on borrowing.
Additionally, the report highlights the potential rise in interest-free capex loans. Initially set at Rs 1.3 trillion in the Interim Budget, this figure is likely to be increased in the final FY2025 Budget. Enhanced capex loans would provide state governments with greater resources for capital expenditures, supporting infrastructure development and public projects.
Icra's full-year estimate for SGS issuance remains at Rs 10.5 to 11 trillion, indicating a stable borrowing environment. If actual issuance aligns with the indicative amounts, the second half of FY2025 is projected to see gross issuance between Rs 6.4-6.9 trillion. This projection provides a clear outlook on the borrowing patterns and fiscal strategies of state governments.
