Home >Politics >Policy >Centre increases reform-linked borrowing ceiling for five states
States have been looking forward to additional resources to tide over the fiscal crisis. (Mint)
States have been looking forward to additional resources to tide over the fiscal crisis. (Mint)

Centre increases reform-linked borrowing ceiling for five states

  • Andhra, Karnataka, Telangana, Goa and Tripura get green signal to borrow an additional 9,913 crore
  • States are now staring at mounting debt as the coronavirus crisis has dealt a severe blow to their goods and services tax (GST) collections

The Centre on Thursday gave permission to five states to borrow an additional 9,913 crore through open market borrowings on an aggregate to expedite reforms at the state level.

Andhra Pradesh, Karnataka, Telangana, Goa, and Tripura were given the green signal for borrowing under the scheme announced in May to raise the borrowing ceiling of the states from 3% of gross state domestic product (GSDP) to 5%. However, the states will have to implement reforms under the One Nation One Ration Card system, which aims to benefit migrant workers, improve ease of doing business, and reform urban local bodies and power utilities.

The riders, however, turned out to be controversial as states have been looking forward to additional resources to meet a humanitarian and economic crisis at a time when revenue collections have fallen sharply. States will have only two resources to bank on, borrowings or grants from the central government, to tide over the fiscal crisis, said experts.

“The central government is trying to incentivize reforms. Fair enough. However, the question is if this is the right time to do it. In this situation, at the national level, for national reasons, you need states to spend more. The reason for raising the borrowing limit is that states could spend more. However, the legislative and regular government process could take time. The intent (of incentivizing reforms with conditions) is right, but I am afraid this is not the right time for it," said Pronab Sen, a former chief statistician of India.

These riders are linked to one percentage point of the extra borrowing allowed, said the Union finance ministry. It had granted permission to states to avail extra borrowings to the extent of half a percentage point of GSDP that is not linked to any reforms. Another half percentage point of extra borrowing ability is linked to the state meeting at least three of the four riders on reforms.

In May, Kerala’s finance minister Thomas Isaac had welcomed the higher borrowing ceiling of 5% of GSDP, but was not happy with the riders.

“The Centre has set a bad precedent. In future, severe conditions may be imposed on even normal loans," Isaac had tweeted on 17 May. States need money there is no economic sense in the central government’s policies when the economy was having its “worst contraction", Isaac had said in an interview with Mint earlier this month.

States are now staring at mounting debt as the coronavirus crisis has dealt a severe blow to their goods and services tax (GST) collections. States have now been offered extra borrowing capacity outside the enhanced borrowing window of 5% GSDP to cover this.

However, states such as Kerala, West Bengal, and Punjab, which are not ruled by the Bharatiya Janata Party (BJP), are putting pressure on the Union government led by Prime Minister Narendra Modi to borrow and compensate them. The combined debt of central and state governments is set to breach 90% of gross domestic product (GDP) for this fiscal year, Moody’s Investors Service had said.

The tension between the ruling BJP and the opposition was evident in the just concluded Parliament session, which also cleared farm sector reforms amid protests by farmer bodies and opposition parties. The Modi government has been nudging states to carry out reforms and even ranking states in terms of their progress in areas such as achieving sustainable development goals and ease of doing business.

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