Higher borrowing by states to widen yields spread with G-Sec

Syllabus: GS-III

Subject: Economic Development

Topic: Government Budgeting.

Context:  States’ borrowing seen at record Rs 4.13 lakh crore in Q4



  • In Q4, Indian states, including Andhra Pradesh, Karnataka, Gujarat, Punjab, Rajasthan, and Bihar, plan to borrow a record Rs 4.13 lakh crore, widening the yield spread with central government securities.

This surge in state borrowing is anticipated to raise concerns over increased supply of dated securities, leading to a potential rise in borrowing costs.

  • The 10-year state government securities’ spread over the benchmark 10-year G-sec reached 53 bps, the highest since January 2022. Economists predict a further widening of spreads due to concentrated supply in the 15-year to 50-year segment.
  • The actual borrowing may vary from the proposed amount, influenced by capex loan schemes and tax devolution.


What are govt securities?

Government security (G-Sec) is a tradeable instrument issued by the central government or state governments.

Key features:

·       Government securities acknowledge debt obligations, with short-term options like treasury bills (less than a year) and long-                  term choices such as government bonds or dated securities.

·       Central and state governments issue these, the latter known as state development loans. As government-backed instruments,                they are risk-free. Foreign Portfolio Investors (FPIs) can participate within set limits.

Conclusion: Concentrated supply in longer-tenure securities raises concerns over borrowing costs, while actual borrowing may vary due to capex schemes and tax devolution.

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