Hike in borrowing limit: Centre issues fresh advisory to states, clarifies on riders

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Published: May 20, 2020 2:00:27 AM

Replacing power subsidy with DBT, cost-linked user charges, property tax floor among key parameters; Central ministries to decide if norms are met

The Centre, as part of the economic stimulus-cum-reforms package unveiled recently, hiked the FY21 net borrowing limit for states from 3% of GDP earlier to 5% of GDP. Similarly, states have to formulate a scheme to roll out direct benefit transfer (DBT) to all farmers in lieu of free electricity from FY22.

The Centre has drawn the contours of the measurable targets in four areas of reforms for states to avail themselves of the additional net borrowing space of a cumulative 2% of gross state domestic product, or Rs 4.28 lakh crore in FY21. In an advisory issued to states, the Union finance ministry has not only explained the key action points, but also entrusted the respective Central ministries – power, housing & urban development, commerce & industry and food – with the task of monitoring and assessing the states’ performance against the targets given. The four line ministries will also be recommending to the expenditure department whether a state should be given the extra leeway linked to reforms.

The Centre, as part of the economic stimulus-cum-reforms package unveiled recently, hiked the FY21 net borrowing limit for states from 3% of GDP earlier to 5% of GDP. However, only 0.5% of GDP is unconditional and the rest 1.5% depends on performance on the four criteria.

According to the finance ministry letter to states in this respect, reviewed by FE, of the 0.25% of GDP borrowing space linked to power sector reforms, states have been asked to reduce aggregate technical and commercial (AT&C) losses of their discoms and also reduce the gap between average cost of supply and average revenue realisation (ACS-ARR gap). Meeting the targets (to be set by the power ministry) in these areas will earn the state concerned borrowing leeway of 0.05% each.

The Ujwal Discom Assurance Yojana (UDAY) — that ran between November 2015 and March 2019 — aimed to reduce discoms’ AT&C losses to 15% and eliminate ACS-ARR gap. AT&C losses were 18.9% while ACS-ARR gap stood at Rs 0.42/unit at the end of FY20. In FY16, the year UDAY scheme was launched, AT&C losses were 20.7% and the ACS-ARR gap was Rs 0.59/unit.

Similarly, states have to formulate a scheme to roll out direct benefit transfer (DBT) to all farmers in lieu of free electricity from FY22. To avail a 0.15% borrowing window, a state will have to implement the DBT scheme at least in one of its districts by December 31, 2020. Based on the progress on the above three parameters, the power ministry will recommend to the expenditure department to release the 0.25% borrowing freedom to each state by January 31, 2021.

SBI researchers said recently that out of Rs 4.28 lakh crore extra borrowing limit for states, only up to Rs 3.13 lakh crore (73%) might be actually utilised by the state governments in FY21. Based on an analysis of 20 states, they said only eight of them are in a position to fulfil all the reform conditions stipulated by the Centre and avail of the extra borrowing limit of 2% of GSDP.

“The assessment of reduction in AT&C losses and in the ACS-ARR gap will be based on self-declaration by the state governments in January 2021. However, any major variation between this self-declared figure and actual realisation assessed later on, may affect the borrowing entitlement adversely in the subsequent financial year(s),” the finance ministry wrote in the letter dated May 17. On Monday, Tamil Nadu chief Edappadi K. Palaniswami termed these as “needlessly onerous conditions” on states and opposed DBT for farmers. Except Karnataka, Madhya Pradesh and Punjab, most states have not shown interest in this regard so far.

In ease of doing business, states will have to complete district level business reform action plans, remove requirement of renewal of certificates/licences/approvals for businesses as per the lists of the department for promotion of industry and internal trade (DPIIT). To end inspection raj (part of labour reforms), the states will implement computerised central random inspection system as per the advice of DPIIT. The requirements include: centralised allocation of inspectors, the same inspector is not assigned to the same unit in subsequent years, prior inspection notice is provided to the business owner, and inspection report is uploaded within 48 hours of inspection.

Similarly, to be eligible for additional borrowing under the ease of doing business criterion, the states have to eliminate renewal needs of at least the specific items mentioned by the DPIIT and implement computerised central random inspection system in certain identified Acts by January 31, 2021.

As for reforms in state local bodies, the finance ministry asked states to notify floor rates of property tax in urban bodies, in consonance with prevailing circle rates and proposed that user charges be levied for water, drainage etc, reflecting current costs/inflation. They will also have to undertake periodic increase in these rates, according to inflation.

The Centre has been nudging urban bodies to take steps to increase their own revenue by tapping other sources like trade licences, taxes on entertainment, mobile towers, solid waste user charges, water charges and parking fees and so forth, without fail. Efficient water-metering systems for residences (which will reduce pilferage that is above 50% in majority of Indian cities/towns) is seen to be a revenue stream that holds great potential. Currently, roughly 60% of the revenue of municipal bodies in the country — about 8,000 in number — comes from devolution by the Centre and states. In FY15, the latest year for which data is available, the combined annual ‘own revenue’ of urban bodies in the country was Rs 1.2 lakh crore or 1% of the country’s gross domestic product. The corresponding figures for comparable countries were much higher — 6% in both Brazil and South Africa.

Under ‘One Nation One Ration Card System’, each state has to complete Aadhar-seeding of all ration cards and beneficiaries and automation of all the fair price shops by December 31, 2020. States which complete them earlier, or have already completed them, can seek additional borrowing limit immediately. This system, will be relatively easy for all states as 17 states are already onboard, will ensure availability of ration to beneficiaries under National Food Security Act and other welfare schemes, especially the migrant workers and their families, at any FPS across the country, and enable better targeting of beneficiaries, elimination of bogus/duplicate/ineligible card holders.

For each sub-limit of additional borrowing in FY21, ministry of power (latest by January 31, 2021), DPIIT (February 15), food (January 15) and urban development (January 15) will assess the performance of each state and make recommendations to the expenditure department of finance ministry for approval.

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