ICRA SDL Note- Gross SDL issuance now estimated at Rs. 8.4 trillion in FY2023


ICRA estimates Central tax devolution to rise to Rs. 9.3 trillion in FY2023: The total tax devolution of Rs. 8.8 trillion
made in FY2022 (higher than the revised estimate or RE of Rs. 7.4 trillion) included the normal adjustment for
FY2021 and a prior period adjustment for FY1997-2018. Setting these two aside, we estimate the devolution for
FY2022 itself at Rs. 8.1 trillion (only 2.8% lower than Rs. 8.2 trillion in FY2023 BE). We estimate tax devolution at a
higher Rs. 9.3 trillion in FY2023. Accordingly, the monthly tax devolution in the coming months of FY2023 is likely to
impact the size of the SDL issuance, as well as the ways and means advances (WMA) and overdraft (OD) usage by
the states/UTs.

The gap between the indicated and the actual State Development Loans (SDLs) issuance widened to a substantial 82% or Rs. 0.5 trillion in the first five weeks of Q1 FY2023. This is likely to have been led by a comfortable cash-flow position of the states following the highly back-ended release of the central tax devolution in FY2022, with nearly half the funds released in Q4 FY2022. We expect tax devolution in FY2023 to exceed the amount included in the FY2023 Budget Estimate (BE) by Rs. 1.1 trillion, which could compress the actual SDL issuance in the remainder of this fiscal. We now estimate the FY2023 gross SDL issuance at Rs. 8.4 trillion.

The highlights of SDL note:

  • Actual SDL issuance has trailed the indicated amount by ~82% in Q1 FY2023 (so far), led by 18 states; only four states have raised SDL in Q1 FY2023
  • On a YoY basis, SDL issuance in FY2023 (so far) has declined by a sharp ~49%
  • This has followed from the release of larger-than-expected tax devolution towards in Q4 FY2022
  • Despite lower supply, weighted average cut-off SDLs have remained between 7.2-7.5% in recent weeks, as compared to 7.17% in Q4 FY2022
  • Timing and quantum of release of GST compensation to states will impact the size of SDL issuance in FY2023
  • ICRA estimates gross SDL issuance in Q1 FY2023 at Rs. 1.4 trillion
  • Frequency of tapping WMA window declined in February 2022 for most states, led by rise in Central transfers
  • OD usage also declined in February 2022