In what could be a much-needed thrust for the infrastructure sector, the central government on Wednesday allowed state governments to borrow directly from bilateral overseas lending agencies to fund major infrastructure projects. Such direct borrowings by state entities would not be counted in the calculation of their respective fiscal deficits, under the states’ Fiscal Responsibility and Budget Management (FRBM) laws.
This marks a shift from the existing system in which state government entities are not allowed to borrow directly from external agencies, but the Central government receives external development assistance on behalf of the state governments for state sector projects. Also, a state government is allowed to borrow only to such an extent, that its fiscal deficit does not exceed the laid down limit of 3 percent of its gross state domestic product (GDP).
These new rules will allow financially sound state entities to directly borrow (and repay) the loan required for major infrastructure projects without burdening the state exchequer with state governments furnishing guarantees for the loans, while the Center will issue counter-guarantees.
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Underlining the need for such move, the Finance Ministry issued a press statement saying, “Several State agencies are implementing major infrastructure projects of national importance. These projects, even if viable and sound, have huge funding requirements and borrowing by the State Governments for such projects may exhaust their respective borrowing limits.”
Soon after the Union Cabinet approved the proposal, Finance Minister Arun Jaitley said that it will benefit directly benefit large infrastructure projects like the Mumbai trans-harbour link (MTHL).
“The Mumbai Metropolitan Region Development Authority (MMRDA), a State Government entity, has also been allowed to borrow directly from Japan International Cooperation Agency (JICA) Official Development Assistance (ODA) loan for implementation of Mumbai Trans Harbour Link (MTHL) project,” the Finance Ministry further said in the press release. The estimated project cost is Rs 17,854 crore out of which the loan from JICA is expected to be Rs 15,109 crore, said the statement.