State borrowing ceiling raised to provide more resources for corona fight

May 17, 2020

New Delhi: The government has decided to provide more money in the hands of state governments to help them in their fight against coronavirus and resurrect the faltering economic activity.

Accordingly, Finance Minister Nirmala Sitharaman on Sunday raised the borrowing limits of states from 3 per cent to 5 per cent of GDP, for financial year 2020-21, acceding to the demand of the states.

The handholding measure of the Centre will give states extra resources of Rs 4.28 lakh crore this year. This would come handy at a time when states’ tax resources have fallen sharply during lockdown while the expenditure need has risen to combat the virus crisis.

Announcing the last set of measures as part of mega Rs 20 lakh-crore economic package on Saturday, Finance Minister Sitharaman said that part of the additional borrowing by states will be linked to specific reforms (including recommendations of the Finance Commission) to ensure sustainability of the additional debt through higher future GSDP growth and lower deficits.

“Reform linkage (to get additional borrowing by states) will be in four areas: universalisation of ‘One Nation One Ration card’, Ease of Doing Business, Power distribution and urban local body revenues,” the Finance Minister said.

It has been decided that a specific scheme will be notified by the Department of Expenditure to allow extra borrowing by the states. Under this, there will be unconditional increase in borrowing by states by up to 0.50 per cent while the remaining 1 per cent increase will be in four tranches of 0.25 per cent each, with each tranche linked to clearly specified, measurable and feasible reform actions.

Further 0.50 per cent borrowing limit will be available to states milestones are achieved in at least three out of four reform areas.

Asked whether additional borrowing limit to states means that the Centre has allowed them to expand their deficit beyond 3 per cent of GDP, Sitharaman said that states have to decide what level of deficit they have to maintain.

According to an analysis done by Motilal Oswal of the fiscal position of 18 states earlier, eight states have already budgeted for a 3 per cent fiscal deficit of the GSDP or higher for FY21, another five states have budgeted for a fiscal deficit of 2.5-2.9 per cent of their respective GSDPs. Only five states have budgeted for a fiscal deficit of less than 2.5 per cent of GSDP in FY21.

States net borrowing ceiling for 2020-21 is Rs 6.41 lakh crore, based on 3 per cent of Gross State Domestic Product (GSDP). About 75 per cent thereof was authorised to them in March 2020 itself and timing is left to the states. States have so far borrowed only 14% of the limit authorised while 86 per cent of the authorised borrowing remains unutilized.

The Centre has been taking steps in the past few weeks to address the issue of state finances that like Centre are facing a sharp decline in revenues. Devolution of taxes (Rs 46,038 cr) in April was given fully to states if Budget Estimates were valid, even though actual revenue shows unprecedented decline from Budget Estimates.

In addition, Revenue Deficit Grants to states (Rs 12,390 cr) was given on time in April and May, despite Centre’s stressed resources

Also, advance release of SDRF (Rs 11,092 cr) funds was given in the first week of April. Release of over Rs. 4,113 crore from Health Ministry for direct anti-Covid activities. At Centre’s request, RBI has increased the Ways & Means Advance limits of States by 60 per cent.

Moreover, the number of days state can be in continuous overdraft has been raised from 14 days to 21 days. Number of days states can be in overdraft in a quarter was also increased from 32 to 50 days. IANS