In a measure that could partially help industrialised states with proven track record (read mainly western and southern states) help raise money from the markets, the government has allowed states to raise Rs 30,000 crore from the market in the current financial year,in its second stimulus package announced on Friday. Each state can now theoretically raise an added 0.5% of its gross state domestic product for capital expenditures, even though practical market conditions doesn?t look? very conducive for such borrowings.
This move shows the government?s willingness to inject liquidity into the states at the cost of absorbing the shock of a higher fiscal deficit. However at the current market conditions, the? possibility of states being able to raise Rs 30,000 crore looks remote, considering the fact that the northern and eastern states haven?t managed to do so successfully even while market conditions were more favourable. Till now however the center has been providing strong? disincentives to the states to borrow from markets by linking their share of? plan grants with the state?s deficit. ?Higher the fiscal deficits figures, lower the plan grant to the state? has been government?s principle since last five years, when government had set its Fiscal Responsibility and Budget Management (FRBM) targets BM targets to reduce the fiscal deficit burden as a percentage of GDP.
While larger states like Tamil Nadu, Maharashtra may be able to benefit to some extent through the sop, the smaller states cannot be expected to raise funds from market at this point of time when market has gone into the slumber, said Amir ullah Khan, economist, India Development Foundation.
The government has preferred to remain mum on the Rs 20,000 crore plan grant demand made by states days before the stimulus package was announced.?The issues were raised at a meeting of the empowered committee of state finance ministers ?in December. ?States are rightfully worried and need to protect their planned expenditure and add stimulus for overcoming the prevailing recession,? Asim Dasgupta chairman of the empowered committee of state finance ministers had said prior to making the demand . States have begun feeling the impact of the slowdown in key sectors like real estate, iron and steel, cement and petrochemical, he said. Over all tax collections by states has nearly halved to 12% in November as compared to a robust 23% in October. Similarly, the collections from value added tax collections have risen by just 19.9% in November as compared to a cumulative growth in collections of 24% between April and October this year.?Along with their lower tax receipts, the lower tax mop up by the Centre will also hurt state finances. States have a 30.5% share in the divisible pool of central taxes, was the plea of states.
The additional Rs 20,000 crore will be used by states for investments in infrastructure, constructing roads and houses and in the social sector, Dasgupta had said.?It was expected? be allocated to states on the basis of the revised Gadgil formula, under which 60% weightage is given to population, 25% to per capita income and 7.5% each to special problems and performance of states while providing funds to them.
Apart from this, states also ?wanted to raise additional funds through additional special market borrowings, beyond their sanctioned quota. ?The borrowing should not be at a relaxed rate but at the 7.5% rate at which the last tranche of funds were raised,? was Dasgupta?s demand. In fact worried by this fall in tax revenue and their much higher expenditure, states?had sought a relaxation in the FRBM?Act, an idea seconded by Planning Commission member Abhijit Sen.
The MSMEs were not enthused with the announcement of special monthly meetings of state level Bankers committee to oversee the resolution of credit issues by banks.