States return to market to raise more debt despite slow capex

State borrowing through state development loans (SDLs), which had briefly eased in October after a surge earlier in the year, rose again in November as several major states returned to the market with large auctions, according to the latest Reserve Bank of India (RBI) data.

The reversal marks a sharp year-on-year swing. States borrowed ₹65,827 crore in November, compared to ₹55,006 crore a year ago and ₹56,000 crore in October, indicating that fiscal pressures have intensified as the calendar year draws to a close. States mobilized ₹84,842 crore in October 2024.

Between April and November (8MFY26), states raised ₹5.08 trillion against a scheduled ₹7.39 trillion for the period according to the borrowing calendar, but higher than last year’s mobilizations of ₹5.01 trillion.

Sluggish spending

To be sure, November’s issuance came mostly from a few large borrowers.

Tamil Nadu led with ₹11,000 crore, followed by Telangana at about ₹7,600 crore and Uttar Pradesh at ₹6,000 crore. Rajasthan, Maharashtra, and Gujarat also tapped the market aggressively, each raising between ₹4,000 crore and ₹5,200 crore. Kerala borrowed ₹3,500 crore, while Bihar, Chhattisgarh, and West Bengal followed with ₹3,000 crore, ₹3,000 crore, and ₹2,000 crore, respectively.

SDLs are bonds issued by state governments to finance their fiscal deficits and fund development projects. They function similarly to central government securities (G-Secs) but are issued by individual states, with the RBI managing the process.

Yet, the borrowing build-up contrasts sharply with the sluggish pace of actual spending, as states have used only 26.3% of their budgeted capital outlay in the first half of 2025-26, according to data from the Comptroller and Auditor General (CAG).

As many as 18 of 20 states analyzed by the CAG have spent less than 40% of their annual capex allocations, with Telangana the rare exception, having utilized 60.8%, highlighting a widening gap between resource mobilization and on-ground execution, stated the data released earlier in November.

A RBI spokesperson didn’t respond to Mint's emailed queries.

Chief Secretaries of Tamil Nadu, Telangana, Uttar Pradesh, Rajasthan, Maharashtra, and Gujarat, the largest borrowers in November, also didn’t respond to Mint's emailed queries.

Expensive debt

SDL yields have remained above 7% throughout the year, underscoring the rising borrowing costs for states, even as issuance patterns have swung sharply from month to month.

Yields are the effective interest rates that borrowers pay and investors earn on bonds, expressed as a percentage of the bond’s price. A higher yield means higher borrowing cost for the issuer and higher returns for the investor.

According to the RBI data, the 10-year SDL yield has hovered around 7.15% in October and 7.2% in November, amid a temporary dip in state borrowing in October.

States typically rely on tax revenues, central transfers, goods and services tax (GST) compensation, and interest-free loans in the first half of the fiscal year before turning to market borrowings, which are usually costlier, in the second half.

As things stand, banks remain the main buyers of state bonds, and any pullback on their part could strain states’ access to funds.

Devendra Pant, chief economist at India Ratings, said the SDL trend cannot be viewed in isolation but must be assessed in the context of the Centre’s borrowing programme, the RBI’s calendar, and the fiscal pressures facing states.

“State capex is typically distributed evenly across the twelve months of the year, just like the Centre’s. What really needs to be seen is how state fiscal deficits have evolved in recent months, and that, in turn, depends on their tax revenues, non-tax revenues, and the flow of central devolution,” he said.

States are permitted to borrow up to 3.5% of GSDP through market loans, primarily to fund fiscal deficits.

However, Pant warned that the emerging pattern, rising borrowing alongside subdued capes, is concerning. “If borrowing continues to rise while capex remains low, it’s not a healthy sign. It indicates that states are borrowing more to fund revenue deficits rather than investing in capital creation,” he said.

He also pointed out that SDLs and Special Assistance to States for Capital Investment (SASCI) loans are designed specifically to support capex, making this divergence more stark.

The Centre’s interest-free capex-loan scheme SASCI has disbursed about ₹50,000 crore to states by the end of October, against the ₹1.5 trillion annual target. This builds on past years. Since its inception in 2020-21, the cumulative sanction under SASCI has exceeded ₹3.6 trillion.

The loans, provided for 50 years without interest, aim to ramp up infrastructure and capex, subject to state-level reforms in areas such as land administration, urban planning and digital public services.

“State SDL borrowing patterns this year have deviated from the traditional rhythm. Normally, states keep borrowing light in the first two quarters and ramp up sharply in Q3 and Q4, especially once the central government completes most of its G-Sec programme by February. But in the current fiscal, both the Centre and states began front-loading their borrowing from April, with a significant focus on long-tenor securities,” said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory firm.

“The temporary dip in October issuance was largely due to excessive supply in the previous quarter and softer investor demand. However, the rebound in November indicates that states are returning to the market to meet their year-end funding requirements,” he added.