The Centre today allowed states with sound finance to borrow an additional 0.5 per cent of their GDP over and above the 3 per cent prescribed by the 14th Finance Commission to help them meet their development needs.
"The Union Cabinet has given its approval to the recommendations on fiscal deficit targets and additional fiscal deficit to states during 14th Finance Commission (FFC) award period of 2015-20 under the two flexibility options," an official statement said.
FFC has provided a year-to-year flexibility for additional fiscal deficit to states.
Taking into account the development needs and the current macro-economic requirement, FFC provided additional headroom to a maximum of 0.5 per cent over and above the normal limit of 3 per cent in any given year to the states that have a favourable debt-GSDP ratio and interest payment-revenue receipts ratio in the previous two years.
"However, the flexibility in availing the additional fiscal deficit will be available to the state if there is no revenue deficit in the year in which borrowing limits are to be fixed and the immediately preceding year," the statement said.
The state will get additional space to raise borrowings, which may result in the much-needed government expenditure for capital projects/infrastructure, it added.
Since 2015-16 is already over, the additional headroom will be available for 2016-17 to 2019-20 and will depend upon respective states meeting their eligibility criteria prescribed by FFC.
"If a state is not able to fully utilise its sanctioned fiscal deficit of 3 per cent of GSDP in any particular year during 2016-17 to 2018-19 of FFC award period, it will have the option of availing this un-utilised fiscal deficit amount only in the following year but within the FFC award period," the statement added.
It further said there will be no financial implications for the Centre as the borrowings will be made by the respective states within the fiscal deficit limits laid down by the Finance Commission and incorporated in the FRBM Act of the states.
"This would incentivise the states to take a more holistic view of their fiscal health rather than the current relatively narrow focus on restricting the fiscal deficit below 3 per cent of GSDP," ICRA Senior Vice-President Jayanta Roy said.
