New Delhi: In a move that will potentially improve India’s infrastructure funding options, the cabinet on Wednesday allowed state government entities to directly tap bilateral agencies for resources.

Not only will this give greater flexibility to state entities to fund infrastructure projects, it will also enable state governments to move some debt off their books.

The new fundraising route will allow for direct borrowing by state public sector undertakings (SPSUs) from Official Development Assistance (ODA) partners in countries like Japan, the US and Germany.

While such a dispensation is available to central public sector units, it wasn’t available for SPSUs, thereby exhausting state governments’ borrowing limits.

Also, these infrastructure projects are long-gestation projects requiring loans with a long tenure.

As part of this new mechanism, Mumbai Metropolitan Region Development Authority will be allowed to borrow directly from the Japan International Cooperation Agency a Rs15,109 crore loan to implement the Rs17,854 crore Mumbai Trans Harbour Link project.

Currently, if an SPSU has to avail of such loans, it has to be facilitated by the respective state government, with such borrowing reflecting on its books. Also, it has to be limited to 3% of gross state domestic product (GDP).

“It reduces the state government’s resources for development spending," finance minister Arun Jaitley said at a press conference.

As per Wednesday’s cabinet decision, eligible state entities can borrow directly with a government guarantee, which frees up the state’s borrowing space, Jaitley explained.

According to the N.K. Singh panel which reviewed India’s fiscal rules, “The states’ combined primary deficit of around 1.3% of GDP is much higher than the centre’s primary deficit of 0.3% of GDP in 2016-17 (BE). This implies that the combined debt of the states is projected to rise even if they adhere to their FRBM (fiscal responsibility and budget management) targets."

The panel has recommended a debt-to-GDP ratio of 38.7% for the central government, 20% for state governments together and a fiscal deficit of 2.5% of GDP by financial year 2022-23.

India plans to invest as much as Rs3.96 trillion in the current financial year to bankroll its new integrated infrastructure planning paradigm comprising roads, railways, waterways and civil aviation.

While the concerned state government will furnish a guarantee for the loan, the Union government will provide the counter-guarantee.

“This dispensation will allow the financially sound state entities to directly borrow and repay the loan required for major infrastructure projects without burdening the state exchequer," a government statement said.

Experts welcomed the move.

“With this move, more vibrant federalism is being brought in where state decides for its own finances...This move gives more responsibility and freedom to the state government. Responsibility and freedom go hand-in-hand with the rider that if they become frivolous in managing their finances, then it will hit India’s balance of payment,"said Jaijit Bhattacharya, partner, infrastructure and government services, at consulting firm KPMG.

It’s a positive step in simplifying the process of financing by bilateral agencies, said Sanjay Garg, partner and leader, capital projects, at PricewaterhouseCoopers.

“This will put more onus on the states to assess viability of projects. There has to be some checks in place to prevent this from becoming a channel for off-budget borrowings, thus circumventing the fiscal prudence requirements," he added.

Gireesh Chandra Prasad contributed to this story.