Borrowing limit for states hiked but subject to reforms

The Centre on Sunday raised borrowing limits for states from 3% to 5% of gross state domestic product (GSDP) for the current fiscal year, subject to their carrying out specific reforms. The move will allow states to get a fiscal headroom of Rs 4.28 trillion.

While both the central and state governments are struggling with cash flows with economic activity coming to a near standstill following the nationwide lockdown, states are facing a more acute cash crunch as they are at the forefront of the battle against Covid-19.

State governments had been urging the Centre to allow them to borrow more from the market to finance these expenses.

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Finance minister Nirmala Sitharaman said the extra borrowing will be linked to specific reforms, including some recommendations by the 15th Finance Commission. States must not only ensure sustainability of additional debt through higher future GSDP growth and lower deficits, they must also promote welfare of migrants and reduce leakage in food distribution, increase job creation through more investments, and safeguard the interests of farmers.

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Out of the 200 basis points increase, 50 basis points will be unconditional, while the next 100 basis points will be divided into four tranches, with each tranche linked to clearly specified, measurable and feasible reform actions. These include reforms in universalization of “one nation one ration card”, ease of doing business, power distribution and urban local body revenues. The remaining 50 basis points of extra borrowing will be allowed if milestones were achieved in at least three out of the four reform areas.

Sitharaman said the Centre has been assisting states to mitigate the revenue shortfall and RBI in March had allowed them to front load 75% of their borrowing for the June quarter. “States have so far borrowed only 14% of the limit authorised. 86% of the authorised borrowing remains unutilized,” she added.

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Karnataka chief minister BS Yediyurappa welcomed the move. “The increased borrowing limit will benefit the states. The states which are distressed due to Covid will be able to revive their economic system,” he said.

While welcoming the overall package announced by Sitaraman, Andhra Pradesh finance minister Buggana Rajendranath Reddy said he would be able to comment on the relief for the states only after studying the details. Telangana finance minister, T Harish Rao, was not immediately available for a comment.

Kerala finance minister Thomas Issac welcomed the Centre’s decision to raise the borrowing limit, which was a long-pending demand of the state, asking the centre to do away with some of the riders prescribed for this.

He, however, criticised the move not to give any direct payment to the millions of migrant workers and the move to privatise some of the key sectors.

DK Srivastava, chief policy advisor, EY India, said, “With the enhanced borrowing programme of the Centre and states, and the borrowing requirement of the public sector enterprises, we consider the total PSRB to be about 14% of GDP for FY21, against available resources of about 9.5% of GDP. States have already experienced a sharp increase in their costs of borrowing as the 10-year state government bond yield auctioned on 7 April rose by nearly 100 basis points, as compared to what prevailed a month before.”

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