By undertaking specified reforms stipulated by the Centre, 23 states could borrow an additional Rs 1.06 lakh crore in FY21, Prime Minister Narendra Modi revealed in a blog posted on LinkedIn on Tuesday, and flagged this as proof that there were many takers among states of sound economic policies
“As a result, the aggregate borrowing permission granted to states for 2020-21 (conditional and unconditional) was 4.5% of the initially estimated GSDP,” Modi noted, adding that the “significant increase in availability of resources was made possible by an approach of Centre-State bhagidari” amid the challenges posed by the pandemic to public finance.
Modi’s remarks came as the Centre is facing a barrage of criticism from the Opposition-ruled states over alleged usurpation of states’ domain in policy-making and fiscal matters. Some states had objected to the reform conditions, and said the Centre’s approach amounted to enforcing its writ on state governments, who have defined constitutional role in governance.
In May 2020, as part of the Aatmanirbhar Bharat package, the Centre announced that states would be allowed enhanced borrowing for 2020-21. An extra 2% of GSDP or Rs 4.28 lakh crore (over customary 3%) was allowed, of which half or 1 percentage point was made conditional on the implementation of certain economic reforms.
India had often seen that for various reasons, schemes and reforms remained un-operational for years, Modi noted, adding that the results of the nudge for reforms was a ‘pleasant departure from the past” where the Centre and states came together to roll out public friendly reforms in a short span of time amidst the pandemic. “This is a new model of ‘reforms by conviction and incentives’,” he wrote.
In FY21, state governments have borrowed an aggregate of Rs 7.98 lakh crore through market borrowings, 26% more than the borrowings in the corresponding period of FY20 (Rs 6.34 lakh crore), according to CARE Ratings.
States resorted to higher market borrowings to meet the shortfalls in their revenues consequent to the drop in their revenues due to the lockdown led disruptions in economic activity even as expenditure increased for controlling and mitigating the impact of the Covid pandemic. The rise in borrowing was accompanied by high-cost borrowings for states.
The average yield on state development loans (SDLs), which used to be 50-60 basis points higher than union government securities, ranged 50 to 120 bps in FY21. The southern state of Kerala, for instance, had to pay as much as 8.96% yield for 15-year securities it issued in April 2020.
Kerala finance minister KN Balagopal told FE recently that the power sector reforms were onerous on the state due to a potential rise in budget outgo, and said these were also not in sync with the state government’s policies.
States were allowed in FY21 to raise additional funds equivalent to 0.25% of GSDP each on completion of four specified reforms — implementation of one nation one ration card system to help migrant labourers access to subsidised food grains anywhere in the country; ease of doing business reform to ensure business licences are automatically renewed online in a non-discretionary manner; property tax and fees on other utilities like water to boost revenues of urban local bodies; and power sector reforms to give direct benefit transfer instead of free electricity to farmers and steps to improve state power distribution firms’ finances.
In FY22, the Centre has set the borrowing limit for states to 4% of GSDP, including 50 basis points linked to capex goals.