Thread by @hemanth2510

This is very interesting especially in the context of the debate on who should borrow (particularly to make up GST shortfalls). So far, states say center gets a better rate. Center says its deficit is too high. 1/

https://twitter.com/dugalira/status/1314429016569335808

Meanwhile, in non-COVID times there was an effort to create differentiated rates for different states. Rationale being: why should, say, Maharashtra or TN pay the same rate on debt as UP despite distinctly better fiscal performance. 2/

Lots of parallels to ECB and how Greece/PIIGS launched into sovereign debt crisis due to severe fiscal indiscipline because they were enjoying the low rates given the implicit debt guarantee (given contagion risk) from the ECB and, therefore, France-Germany. 3/

Now, in the post-COVID era, especially with the GST shortfall, the question is should we prioritize a very federalist fairness, set efficient market rates, reward/enable good governance, etc. or should we (indirectly) subsidize debt for poorer states? 4/

As is, state level capital expenditure has been steadily declining due to lower funds. With restrictions on borrowing, states have been spending mostly on revenue expenditure. This likely means there’s a significantly lower than desirable multiplier on state expenditure. 5/

Now, for the first time ever, RBI is buying state bonds—i.e., buying debt of states. This directly supports higher borrowings for states—good support. But, this will also be bought in the secondary market, i.e., at a market price? 6/

Now this will be very interesting to see operationalized. How much of which bonds/states at what prices do they end up buying? What will be the effect of this on the pricing of state govt bonds? N/

@threadreaderapp unroll