Why states are not liking Centre’s extra borrowing limit conditions

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Published: May 19, 2020 1:00:32 AM

At least three Opposition-ruled state governments - Tamil Nadu, West Bengal and Kerala - have come up against the Centre’s decision to link 75% of the extra borrowing space accorded to them, to how they work on and achieve specified reforms.

In a scathing letter to Prime Minister Narendra Modi, Tamil Nadu chief Edappadi K. Palaniswami said the state is opposed to the Centre’s moveIn a scathing letter to Prime Minister Narendra Modi, Tamil Nadu chief Edappadi K. Palaniswami said the state is opposed to the Centre’s move

At least three Opposition-ruled state governments – Tamil Nadu, West Bengal and Kerala – have come up against the Centre’s decision to link 75% of the extra borrowing space accorded to them, to how they work on and achieve specified reforms. In a scathing letter to Prime Minister Narendra Modi, Tamil Nadu chief Edappadi K. Palaniswami said the state is opposed to the Centre’s move, which inter alia asked for stopping free power supply to farmers.

Calling the conditions put forth by the Centre for the states to fully use the higher borrowing limit as ‘needlessly onerous’, Palaniswami said: “While in some of the four major areas of reform required by the government of India to avail of the additional borrowing, the state government has already undertaken the reforms without expecting any financial assistance, there are some areas, most specifically in the area of power distribution reforms, which are politically sensitive.”

“Protest making of additional loans conditional. Most of these conditions can easily be implemented through dialogue. Centre has set a bad precedent. In future severe conditions may be imposed on even normal loans,” Kerala finance minister Thomas Isaac tweeted.

“This is crushing federalist polity of India in steady and strategic manner where the diktat of the Centre will be the order of the day and the elective representatives of the people in the states will have no choices,” Telegraph quoted West Bengal finance minister Amit Mitra, as saying.

Union expenditure secretary TV Somanathan defended the conditions citing constitutional provisions in this regard. “In order to borrow, states need the Centre’s nod under Article 293,” Somanathan told CNBC TV18.

Union finance minister Nirmala Sitharaman on Sunday raised the net borrowing limit for state governments from 3% of G-SDP to 5% to make available an additional Rs 4.28 lakh crore to all the states combined. While 0.5 percentage point of the extra borrowing window will be available to all states unconditionally, 1 pps will be made available in four equal tranches with each to clearly “specified, measurable and feasible reform actions”.

The balance 0.5 pps can be accessed if milestones are ‘completely achieved’ in at least three out of four reform areas. The reform linkage will be in four areas -universalisation of ‘One Nation One Ration Card’, ease of doing business, power distribution and augmentation of urban local body revenues.

The raising of the borrowing limit would mean the states could borrow an additional Rs 4.28 lakh crore from the market on a net basis if all the conditions are adhered to. States have been demanding the hike in borrowing limit given that there revenues have been squeezed and Covid-19 pandemic has dramatically increased their short-term expenditure on healthcare and welfare schemes.

The Finance Commission had already recommended the implementation of direct cash transfers by states to provide subsidy to eligible power consumers. The release of the Rs 90,000 crore loan through PFC-REC to discoms will also be contingent on the respective state government undertaking to put in place a credible mechanism to release the subsidies – meant for the consumers but routed through the discoms – in advance.

Aggressively pushing a reform agenda on which a consensus is yet to be developed at a time when states have approached the Centre for additional borrowing out of sheer desperation, is not in keeping with the spirit of co-operative federalism, Palaniswami said.

“Ideally, the proposed reforms ought to have been discussed in detail with the states, a consensus developed depending on the specific conditions in each state and the reforms linked to special Central Covid grants, and not to additional borrowing by the state. Linking the Central government’s power under Article 293(3) of the Constitution to permit additional borrowing by the states to conditionalities is unprecedented,” he added.

However, BJP-ruled states and some non-BJP states like Odisha (ruled by the BJD) were not so critical of the Centre’s move to put conditions. Bihar (BJP is part of the state government) deputy chief minister Sushil Kumar Modi in fact welcomed the higher borrowing limit, which could give an additional Rs 12,922 crore debt window for the state.

Officials from over half a dozen states told FE that their states’ own tax revenues in April were less than a fourth of the usual (estimated) level, with some putting the figure at even 10%. This had prompted several state chief ministers to demand that the FRBM- mandated fiscal deficit ceiling be raised from 3% of GSDP to 5% for FY21 to enable them to borrow more funds.

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