State govt borrowing limit hiked to 5% of GSDP; mostly linked to reform goals

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May 18, 2020 4:01 AM

The Centre on Sunday acceded to a strident demand from states that their market borrowing limit be enhanced to meet the expenditure contingencies of the Covid-19 pandemic amid a glaring revenue deficit.

The move is also being seen a sequel to the Centre’s recent informal advisories to the states, urging them to undertake labour and land reforms

The Centre on Sunday acceded to a strident demand from states that their market borrowing limit be enhanced to meet the expenditure contingencies of the Covid-19 pandemic amid a glaring revenue deficit. However, the government did a smart thing by linking a considerable part of the extra borrowing freedom to efforts towards and fulfillment of long-pending reforms, including in the key areas of ease of doing business and the power sector, where free play of market forces continues to be a political anathema. The move is also being seen a sequel to the Centre’s recent informal advisories to the states, urging them to undertake labour and land reforms, that are critical to enhancing the global competitiveness of Indian industries.

Finance minister Nirmala Sitharaman raised the net borrowing limit for state governments from 3% of the gross state domestic product (GSDP) to 5% to make available an additional Rs 4.28 lakh crore to all the states combined. While 0.5 percentage point (pps) of the extra borrowing window will be available to all states unconditionally, one 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. While a specific scheme will be notified by the expenditure department, 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.

Sitharaman pointed out that the states together have only utilised 14% of Rs 4.8 lakh crore (75% of the FY21 net borrowing limit of Rs 6.41 lakh crore set earlier for the full year) so far this fiscal. Even though the FY21 net borrowing limit is being raised to Rs 10.69 lakh crore, the states may not find it easy to tap market for funds given the recent spike in state development loans (SDLs).

The spike in SDLs forced some states like Andhra Pradesh not to accept bids in recent auctions while Kerala was forced to borrow at a high rate of 8.9%.

To create competition among states on the ease of doing business, the endeavour will likely be to make the processes simpler and transparent, reduce the timelines for various regulatory approvals and eliminate physical interface between the department and the business with the ultimate aim of increasing investments in the states to boost exports. While there may not be any direct reference to land and labour reforms, the Centre could also push states in this regard. The 15th Finance Commission chairman has on several occasions sought reforms in important factors of production such as land and labour to boost private investments.

After failing to get the backing of the opposition parties, who have objected to proposed removal of the mandatory social impact assessment and consent clauses from the land acquisition Act, the first Narendra Modi government had kept its plan on hold in 2015. Since the land is on the concurrent list, where both the Centre and states have jurisdictions, there is a change in strategy to let the states bring about changes which will later be approved by the Centre.

The states will also likely play a key role in labour reforms as the Centre is amalgamating 44 central labour Acts into four codes. The Industrial Relations Code empowers states to offer flexibility to the investors, employing up to 300 from 100 now, to resort to layoff, retrenchment or closure without government permission. Taking the lead, the Uttar Pradesh government has decided to keep most labour laws in abeyance for the next three years, while Madhya Pradesh chief minister Shivraj Singh Chouhan said his government would seize the current opportunity to bring the much-needed reforms in the state’s labour laws to lure investors, including those likely relocating from China.

“States need to get their act together doing discom reforms, ULB revenue, ration card and ease of doing business. These 4 conditions are quite open ended and would have to be defined by the Centre or else there could be ambiguity,” CARE Ratings said.

The states’ revenues could suffer massively in FY21 due to lockdown and social distancing to check the spread of coronavirus. At the same time, their expenditure obligations have risen. Officials from over half a dozen states told FE that their states’ own tax revenues (OTRs) 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 have demanded that the FRBM-mandated fiscal deficit ceiling be raised from 3% of GSDP to 5% for FY21 to enable them to borrow more funds. While petitioning the Centre for additional funds to combat the pandemic, many states have front-loaded their borrowings. Some even used more than 90% of the Q1 borrowing window, even disregarding high interest costs.

Even before Covid-19 hit their finances hard, state governments had faced severe revenue constraints through the second half of the last fiscal. Tax revenues of 14 states – whose budgets were reviewed by FE – grew a measly 1.9% in the first eleven months of FY20, against 13% a year ago. To soften the blow to their balance sheets, these states applied the brakes on capital expenditure (flat growth against 20% growth a year ago), but might still have to report fiscal slippages for FY20. The combined fiscal deficit of all states was budgeted at 2.6% of GDP in FY20, up from 2.4% in FY19. However, the actual combined fiscal deficit of states in FY20 is believed to have risen from the budgeted level.

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