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Prepared by Adil Mohommad and Racha Moussa.
About 140 basis points of increase in state debt to GDP over the last 2 years is explained by broad subscription by states to the UDAY scheme to fix state power sector financial problems, by taking over the debt of state electricity distribution companies to allow them to resume operations, in return for commitments to fix power sector problems.
Though the authors list borrowing against small savings and provident funds as not perceived to have a guarantee, the authorities view these instruments as also perceived to be backed by guarantees.
Results are available upon request.
Bayoumi et al. (1995) show debt levels increase borrowing costs, but in the presence of fiscal rules (which limit debt), borrowing costs are lower. Poterba and Rueben (2001) show states with strong anti-deficit rules, debt limits, and expenditure limits experience relatively smaller increases in spreads from deficit shocks, compared to states lacking such rules or having revenue limits. Johnson and Kriz (2005) show expenditure limits, stricter balanced budget rules, and restrictions on state debt issuance are indirectly associated with lower interest costs because they lead to higher credit ratings. On the other hand, revenue limits directly raise interest costs.
IMF Country Report No. 17/390.