Fiscal stimulus 2.0: States allowed to borrow more, but with conditions

Officials say states have been sent a memorandum explaining the needed reforms

Acceding to the demand by states to let them borrow more in light of resource crunch and expenditure commitments during Covid-19, Finance Minister Nirmala Sitharaman said on Sunday the Centre had increased their borrowing limit to 5 per cent of their respective gross state domestic product, from 3 per cent, only for the current fiscal year.

However, this increase would be linked to strict conditions. Immediately after Sitharaman’s briefing, the Finance Ministry issued a memorandum to states detailing these conditions and goals. The FM said this would give states “extra resources of Rs 4.28 trillion”. The move comes just a week after the Centre increased its own borrowing target for the year by Rs 4.2 trillion.

Sitharaman said that part of the borrowing would be linked to specific reforms, which include some of the recommendations of the 15th Finance Commission’s first report. The four areas which the borrowing would be linked to include universalisation of ‘one nation, one ration card’, ease of doing business, power distribution, and urban local body revenues.

“The states have been given specific, measurable targets under each of these areas,” a top government official said. The targets have been given to ensure sustainability of additional debt through higher future GSDP growth and lower deficits, promoting welfare of migrants, reducing leakage in food distribution, increasing job creation through investment, safeguarding the interests of farmers while making the power sector sustainable, and promoting urban development, health, and sanitation. “The states have to ensure that there is an improvement in their fiscal deficits. It can either be through higher revenues or higher growth,” the official said.

Sitharaman said that of the states’ existing total borrowing requirement of around Rs 6.4 trillion in 2020-21, they had been authorised to raise 75 per cent in March itself. But only 14 per cent of that 75 per cent has been used by states, she said. 

She said that beyond the 3 per cent of GSDP borrowing limit, there would be an unconditional increase of 0.50 per cent.  “This adds to the 25 per cent of the original borrowing limit that is still not authorised. When that is given, it will be unconditional as well,” the official quoted earlier said.

Now beyond the limit of 3.5 per cent of GSDP, an increase of 4.5 per cent of GSDP will be allowed in four tranches of 0.25 per cent, with each tranche linked to clearly specified, measurable, and feasible reform action. “Further 0.50 per cent, which will take the limit to 5 per cent of GSDP, will be allowed if milestones are achieved in at least three of four reform areas.” 

West Bengal Finance Minister Amit Mitra said: “This is another smokescreen. It should have been increased from 3 per cent to 5 per cent. Instead, it has been made unconditional up to 0.5 per cent and the rest is being dictated by the Centre. This is a way of undermining the autonomy of the states.”

“States are being allowed to borrow with conditions dictated by the Centre without any discussion with the states. It is a serious undermining of the federalist structure. Every time we go to the market to borrow, the Centre has to okay it, so where is the need to attach conditions,” he said.

Kerala Finance Minister Thomas Isaac said with the raised borrowing limit, the state would be able to raise Rs 18,087 crore, but added that the calculation should be made on the basis of the allocation made in the Central Budget and not on the current GDP, which will soon turn negative for both state and Centre.  

R K Gurumurthy, head of treasury, Laxmi Vilas Bank, said: “The increased borrowing limit will certainly help states fund the revenue shortfall arising out of the extended lockdown and declining economic activity. However, this additional facility is contingent upon certain reform milestones and states will be eligible only on achieving them. There are many moving parts and, hence, it may take time to translate into a liquidity impacting measure.”

According to D K Srivastava, chief policy advisor, EY India, not many states may avail of the entire incremental amount due to the likelihood of a tangible increase in the borrowing cost because of the large gap that appears to be emerging between the total public sector borrowing requirement and the available resources.