Not worth celebrating about

Recently it was in the news that the Amaravati Bonds were oversubscribed. This was followed by joyous celebration in the CRDA, state government and a section of the press proclaiming it as the success of Brand Amaravati. When someone takes a loan for a purpose his immediate thought would be on how to utilise it to get streams of income to repay the loan. 

If the rate of interest happened to be high he would rather be a bit worried than in a joyous celebration mood since he knows clock starts ticking immediately and interest burden can be oppressive. It is only someone who has no intentions of repaying and was lucky enough to dupe the moneylender who would be in a joyous mood and would be celebrating his ability to manage a loan. Amaravati bonds are backed by state government guarantee and a commitment to repay. Question of non-repayment does not arise. Further the interest rates are quite high. Hence I was not able to understand what particular aspect of the bond gave cause for celebrations.

In February 2018 through a GO 65 dt 8-2-2018 Andhra Pradesh government advised CRDA to go for bonds for fixed rate of interest only when rates of interest are far below the interest rates for term loans with appropriate clauses for prepayment. This they observed is essential in a regime of reducing interest rates. 

This makes a lot of sense since there will be no point in getting stuck with loans with high interest rates when the interest rates are falling over a period of time. It would be appropriate for the government to have the option to prepay the loan in such a situation. It also makes clear any such exercise is advisable only when the interest rates on the bonds are far below interest rates for the term loans. 

Contrary to the above advice the department in August 2018 through GO 266 dated 9-8 -2018 permitted CRDA to go in for bonds with an interest-rate of 10.32 per cent quarterly. There seems to be no prepayment option and state will be the loser in an era of downward interest rate period. The present ten- year bench mark rate is around 7.86 to 8 per cent. 

Hence contrary to the stand taken in February, government has now permitted CRDA to go in for a high cost debt with no prepayment option. It goes without saying during intervening period there would have been undue influence both on the finance department as well as the municipal administration department to change their stand on the issue. 

The loan is fully guaranteed by the government with a proposal to open a separate account which would be made good by the government well in advance to meet the repayment obligations of the CRDA. Since no streams of income are available to CRDA in the near future the loan has to be necessarily serviced by government of Andhra Pradesh. Another interesting aspect to this issue is payment of 0.85 per cent as arranger fee. 

Which means for every thousand crore  of bonds subscribed Rs 8.5 crore  will be paid to the arranger. similar issue recently released by GHMC arranger fee was.1per cent. They will be paying one crore for every thousand crore  subscribed. This would mean either CRDA bonds are considered high risk or a proper transparent procedure was not followed while selecting arranger.

How are these funds raised through the bonds going to be utilised? CRDA which could not construct a single permanent structure and could not spend Rs 1500 crore released by GOI in the last four years suddenly woke up and called for tenders for about Rs 60,000 crore in an election year. The proceeds of the bonds are going to be utilised  for that purpose. 

Balance CRDA proposes to raise Rs 20,000 crore from Hudco, Rs  10,000 crore from Andhra Bank and Indian Bank, Rs 7000 crore as equity from state government, Rs 6000 crore from the World Bank and about Rs 2500 crore  from Government of India as grant. Except the Rs 2500 crore  from Centre, none of the above amounts are likely to materialise including Rs 7000 crore  as equity from state government which already has an overstretched budget. Even if they materialise partly, interest rates are going to be prohibitive.

Since CRDA does not have streams of income nor is likely to have in near future all these loans have to be serviced by the state government and state government will have to stand guarantee to the same. The state already has a debt stock of two lakh crore  by the end of March 2017 which is 29per cent of the state GSDP. If the Rs 60,000 crore  is further added it would be 37 per cent of the state GSDP. Given the capital expenditure of Rs 15000 crore  for 2016-17 for the next five to six years there will be no other activity in the state except the Amaravati tendered works assuming state would be lucky enough to mobilise these loans. 

The state incurred a debt of Rs  60000 crore  in 2016-17 to maintain Rs 15000 crore capital expenditure. For any further amounts to be raised interest rate is going to be above 10.32  per cent now that this is set as the base. With a huge debt stock already with the state and this additional debt adding to it at high cost the state is bound to get into a debt trap burdening people at large.

The problem is not with capital Amaravati which in any case can be completed with an expenditure of Rs 5 - 10,000 crore. The problem is with an instant mega city Amaravati which is going to be a millstone around the neck of the state of Andhra Pradesh especially the manner in which it is being rushed through without a proper thought process. Thus the oversubscription of the Amaravati bonds there is nothing much to celebrate about.