A.P. raises ₹4,000 crore through open market borrowings

Andhra Pradesh's recent raising of ₹4,000 crore through open market borrowings (OMBs), pushing its total for the calendar year past ₹86,000 crore, offers a critical lens into the fiscal dynamics of Indian states. This event is not an isolated incident but reflects a broader trend among states to rely on market-based financing to meet their expenditure needs, particularly in an era of constrained revenue growth and increasing developmental demands.

**Background Context and What Happened:**

Open Market Borrowings (OMBs) are a primary mechanism for state governments to raise funds directly from the financial markets. States issue bonds, known as State Development Loans (SDLs), which are essentially debt instruments. These SDLs are auctioned through the Reserve Bank of India (RBI) to a wide array of investors, including commercial banks, financial institutions, mutual funds, insurance companies, and even individuals. The funds raised are typically used to finance infrastructure projects, social welfare schemes, or to bridge revenue deficits. Andhra Pradesh's significant borrowing figure of over ₹86,000 crore for the year indicates the state's substantial reliance on market debt to fund its ambitious programs and meet its fiscal obligations. This trend has been exacerbated in recent years by various factors, including the economic slowdown, the Goods and Services Tax (GST) implementation leading to some revenue uncertainty, and the fiscal pressures induced by the COVID-19 pandemic, which necessitated increased public spending on health and relief measures.

**Key Stakeholders Involved:**

Several key players are central to this process. The primary borrower is the **Andhra Pradesh Government**, which identifies its financial needs and decides on the quantum and timing of borrowing. The **Reserve Bank of India (RBI)** plays a crucial role as the debt manager for state governments. It facilitates the auction of SDLs, manages the public debt, and advises states on their borrowing strategies. **Commercial Banks, Financial Institutions, Mutual Funds, and Insurance Companies** are the major investors (lenders) in these SDLs, seeking safe investment avenues for their funds. The **Union Government** also acts as a significant stakeholder, as it sets overall borrowing limits for states, often based on the recommendations of the Finance Commission, and can influence states' fiscal space through grants and transfers. The **Finance Commission**, constituted under Article 280, periodically recommends the framework for fiscal transfers and borrowing limits for states, playing a crucial advisory role.

**Significance for India and Historical Context:**

This episode underscores critical aspects of India's **fiscal federalism**, which governs the financial relationship between the Centre and states. States need financial autonomy to address their specific developmental needs, and market borrowings provide this flexibility. However, it also highlights potential challenges related to **public debt sustainability**. When states borrow heavily, it adds to the overall public debt burden, which can have long-term implications for future generations and the economy. Historically, states' access to market borrowings has evolved. Initially, states were heavily dependent on central assistance. Over time, with financial sector reforms and greater fiscal devolution, states gained more autonomy to raise funds from the market. The introduction of **Fiscal Responsibility and Budget Management (FRBM) Acts** at both central (FRBM Act, 2003) and state levels aimed to instill fiscal discipline by setting targets for fiscal deficit, revenue deficit, and debt-to-GDP ratios. Despite these acts, states often face pressures to exceed these limits, especially during economic downturns or to fund populist schemes.

**Future Implications and Constitutional Provisions:**

The continuous increase in state borrowings, as exemplified by Andhra Pradesh, raises concerns about **debt sustainability**. If a state's debt-to-GSDP (Gross State Domestic Product) ratio crosses prudent limits, it can lead to higher interest payments, crowding out essential developmental expenditure, and potentially impacting the state's creditworthiness. This could, in turn, lead to higher borrowing costs in the future. It also signifies the need for states to focus on enhancing their own revenue generation capabilities and exercising greater expenditure rationalization. From a broader perspective, it could prompt the Union Government and the Finance Commission to review and potentially tighten the borrowing norms for states. The issue of states' borrowing is directly governed by **Article 293 of the Indian Constitution**, which deals with borrowing by states. Article 293(1) states that a state may borrow within the territory of India upon the security of its Consolidated Fund. Article 293(3) is particularly significant, as it mandates that a state cannot, without the consent of the Government of India, raise any loan if there is still outstanding any part of a loan made to the state by the Government of India or by its predecessor Government, or in respect of which a guarantee has been given by the Government of India. This provision gives the Centre significant control over state borrowings, especially for states already in debt to the Centre.

In conclusion, Andhra Pradesh's substantial open market borrowings are a microcosm of the larger fiscal challenges and opportunities facing Indian states. It underscores the delicate balance between fiscal autonomy, developmental needs, and the imperative of long-term debt sustainability within India's federal structure. Understanding this dynamic is crucial for comprehending the broader economic governance of the country.