Covid-19 Economic Package: Government Allows Increased State Borrowings With Conditions Attached

States can borrow over Rs 10 lakh crore in FY21 but with conditions attached.

The portrait of Mahatma Gandhi is displayed on an Indian 50 rupee, left, and 2000 rupee banknotes. (Photographer: Brent Lewin/Bloomberg)
The portrait of Mahatma Gandhi is displayed on an Indian 50 rupee, left, and 2000 rupee banknotes. (Photographer: Brent Lewin/Bloomberg)

The Indian government has raised the borrowing limit for states sharply to a total of over Rs 10 lakh crore, amid expectations that the Covid-19 pandemic will lead to a surge in expenditure. However, the increased borrowing limits have come with conditions attached, which seek that states implement reform priorities laid down by the central government.

The announcements came as part of the final set of measures part under the government’s Rs 20-lakh-crore economic support package.

The New State Borrowing Math

States will be allowed to borrow up to 5 percent of gross state domestic product compared to the current limit of 3 percent, said Finance Minister Nirmala Sitharaman at a press conference on Sunday.

Borrowing limit of states is capped under the Fiscal Responsibility and Budget Management Act. Any additional borrowings have to be cleared by the centre.

The altered limits will mean:

  • States will be allowed to borrow an additional Rs 4.28 lakh crore
  • The earlier limit for state borrowings was set at Rs 6.4 lakh crore
  • As such, the total limit works out to Rs 10.68 lakh crore
  • So far states have borrowed 14 percent of the earlier authorised limit

Increased Borrowings Come With Conditions Attached

The increased borrowings, however, come with conditions attached, which include milestones linked to a reform agenda laid down by the central government.

According to the finance minister:

  • An increase of 0.5 percentage points is unconditional and will be applicable immediately.
  • A further increase of 1 percentage point will be released in four tranches of 0.25 percentage points each, linked to state performance in four areas of reform outlined by the government.
  • These areas include: One nation, one ration card scheme; ease of doing business; reforms of power sector distribution companies; reforms of urban local bodies.
  • “Measurable” actions would need to be taken to ensure release of these tranches.
  • The final 0.5 percentage points in increased borrowing limit will be unlocked if targets are met in three of the four outlined areas.

Cumulative Centre, State Borrowings

Should the states manage to meet these milestones set by the government, the cumulative market borrowings would be close to Rs 22 lakh crore, which includes Rs 12 lakh crore from the centre and Rs 10 lakh crore from states.

The timing and actual borrowings from states, however, would depend on their ability to meet the milestones laid down.

“An increase in the state government borrowing limit to 5 percent of GSDP will help to absorb the expected plunge in their revenue receipts, and avoid a severe cutback in capital expenditure. However, the permission to increase borrowing to this level will be largely contingent on the achievement of various reforms,” said Jayanta Roy, group head for corporate sector ratings at ICRA Ltd.

Commenting on the central government’s decision, Kerala finance minister Thomas Issac said the increased limits are welcome but added that the conditions attached will set a bad precedent.

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