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ICRA Ratings in its latest report has said that tax devolution by the central government is likely to exceed the budget estimate by at least Rs 1.1 lakh crore in FY23, leading to compression in the gross borrowing by states to Rs 8.4 lakh crore. However, the borrowing cost for the states went up from 7.17 per cent in Q4 FY22 to 7.34 per cent on May 2 this fiscal.

The report stated that the central tax devolution is likely to rise to Rs 9.3 lakh crore in FY23 from Rs 8.8 lakh crore in FY22 and from Rs 8.2 lakh crore estimated in the FY23 budget. The FY22 devolution was higher than the revised estimate of Rs 7.4 lakh crore and 2.8 per cent lower at Rs 8.1 lakh crore. It said during the first five weeks of the first quarter of this fiscal, states have borrowed 82 per cent less than what was indicated in the borrowing calendar, at just Rs 12,400 crore against Rs 67,200 crore indicated initially by 19 states, following higher-than-expected devolution in Q4 FY22 at Rs 95,100 crore on March 24, and 31.

The agency had estimated net and gross SDL (State Development Loan) issuance in FY23 at Rs 6.6 lakh crore and Rs 8.9 lakh crore, respectively last month. But taking into account the actual issuance, which is 82 per cent lower than indicated so far, it estimates the gross issuance at Rs 8.4 lakh crore, and adjusting for the expected redemptions of Rs 2.4 lakh crore in this fiscal, net issuance is likely to be Rs 6 lakh crore, up only 21.9 lakh crore from Rs 4.9 lakh crore in FY22. It noted that the pattern of monthly tax devolution releases and the timing of GST compensation payout for December and March quarters for FY22 and Q1FY23 will not only impact SDL issuance but also cull the demand for Ways and Means Advances (WMA) and Overdraft (OD) in FY23.