More room for states: Finance Ministry may ease borrowing limit beyond 3% of GSDP

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New Delhi | Updated: December 14, 2015 6:38:51 AM

States will have more room to borrow this financial year with the Ministry of Finance expected to soon approve relaxation of their borrowing limits beyond 3 per cent of Gross State Domestic Product (GSDP), subject to conditions that are in line with recommendations of 14th Finance Commission.

Gross State Domestic Product, GSDP, Finance Commission, UDAY, UDAY scheme, Ujwal Discom Assurance Scheme, indian expressDuring the conference of states’ finance secretaries last week, finance secretary Ratan Watal had said the government is in discussions with states to relax their fiscal deficit limits from 3 per cent of GSDP to a maximum of 3.5 per cent of GSDP. (Reuters)

States will have more room to borrow this financial year with the Ministry of Finance expected to soon approve relaxation of their borrowing limits beyond 3 per cent of Gross State Domestic Product (GSDP), subject to conditions that are in line with recommendations of 14th Finance Commission.

Officials said the ministry will provide case-by-case approval to states for additional borrowing to help them enhance their capital expenditure.

“Finance minister will soon approve the relaxation in borrowing limits for states. The decision is in final stages. The blanket approval will be followed by case-by-case approval to states,” a senior finance ministry official said.

The move is an attempt to de-link the fiscal relaxations granted to states under the ongoing scheme of UDAY (Ujwal Discom Assurance Scheme), with the finance ministry even looking at relaxing borrowing limits of states which have not yet participated in the scheme, the official added.

The finance ministry will grant case-by-case approval to relax fiscal deficit limits under the Fiscal Responsibility and Budget Management Act (FRBM) subject to fulfillment of three conditions as specified in the Fourteenth Finance Commission recommendations.

Firstly, states should have had no revenue deficit this year and in the preceding year. The states will be eligible for flexibility of 0.25 per cent over and above the fiscal deficit limit of 3 per cent of GSDP if their debt-GSDP ratio is less than or equal to 25 per cent in the preceding year.

States will be further eligible for an additional borrowing limit of 0.25 per cent of GSDP this year if the interest payments are less than or equal to 10 per cent of the revenue receipts in the preceding year.

“There were talks that a Cabinet nod may be required but the ministry’s nod is enough for relaxing the limits. The permission will be granted as per specified in Article 293 (3) of Constitution,” the official said.

“The Cabinet nod for relaxation of FRBM limits was provided earlier itself for UDAY scheme but case-by-case approval is needed for the implementation. The increase in fiscal deficit limits will help states to enhance their fiscal space,” the official said.

So far, ten states, namely Andhra Pradesh, Chhattisgarh, Gujarat, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Madhya Pradesh, Punjab, Rajasthan, and Uttarakhand have joined the UDAY scheme. Under the UDAY scheme, which was launched last month, the government had asked states to voluntarily take over 50 per cent of the loans of state electricity boards (SEBs) by March 31, and 75 per cent by the end of FY17.

These taken-over loans will not be counted for the states’ FRBM for the current fiscal year and the next. The states, in turn, will have the facility of a concessional interest rate of about 9 per cent for servicing the loans, as against rates of over 13 per cent that is charged at present on SEBs’ outstanding debt. The states will issue bonds at 0.5 per cent above the G-sec coupon rate, to finance the restructuring.

From 2017-18, the SEBS’ losses, if any, will have to be taken over by the states without any relief on the FRBM front.

During the conference of states’ finance secretaries last week, finance secretary Ratan Watal had said the government is in discussions with states to relax their fiscal deficit limits from 3 per cent of GSDP to a maximum of 3.5 per cent of GSDP.

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