State of the states

While all are awaiting what the Union Budget has in store for them and every sector but not to deny the real action lies ultimately in, the states.

Last year, the passing of 42 per cent of Central tax revenues to the states, as against the earlier 32 percent share is considered to be one of the Narendra Modi’s actually game-changing initiatives. This single move, last year along with the sharp cutbacks in most Centrally sponsored schemes shifted the responsibility for much of governmental spending to the states. Any dealing with drought or handling violent agitation of Jats and Patidars demanding quotas in government jobs and educational institutions, the state will be in the direct line.

It is against this milieu that two latest developments worth closer attention.

The auctions of state development loans with the interest rates paid on a 10-year borrowings ranged from 8.63 to 8.88 per cent.

This signifies the current 10-year Indian government bond yields of 7.78 per cent and 8.04-8.08 per cent cut-off rates for loans of the same tenure raised by the states in February 2015.

The Seventh Pay Commission made way to the higher borrowing costs.

The last week’s railway budget, showed how the salary and pension bill for the transport behemoth is scheduled that will go up by nearly rs. 28,600 crore in 2016-2017.

If the states were to follow suit — which they are bound to — the impact on their finances is probably yet to even be fully factored in.

The worst scenario would be if much of the hand-out for the states from high delegation goes towards payment of revised pay and pension scales, which is accompanied by rising borrowing costs (more so with the debts of power distribution companies getting converted into state government bonds under the Ujwal Discom Assurance Yojana or Uday), and the states not adequately filling the void created by reduced Central spending (especially in agriculture, health and education).

The simple point is that one shouldn’t look too much at the Union budget, beyond it laying the overall policy direction and signaling to investors on the course of developments.

But even there, it is the actions and initiatives being taken at the state-level that matter more today.

 

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