Borrowing with Cash in Hand: The fiscal cost of treasury conservatism
This paper develops and applies a simulation framework for evaluating treasury cash management efficiency in subnational governments. Using daily data from the Indian state of Meghalaya (2013-2021), we document systematic over-accumulation of cash buffers, minimal use of low-cost short-term liquidity facilities, and continued long-term borrowing despite idle balances. We formalize treasury management as an intertemporal optimization problem and simulate alternative liquidity strategies. Results indicate that modest buffer recalibration could have reduced state debt by ₹1,900 crore (≈12% of overall debt) and generated interest savings exceeding ₹133 crore. The findings highlight the fiscal costs of treasury conservatism and demonstrate the value of integrating liquidity and debt management.
