Credit for reform: Centre allows 5 states to borrow Rs 9,913 cr extra

In normal times, the states can borrow to the point that their fiscal deficit does not cross three per cent of their respective gross state domestic product (GSDP).
The central government on Thursday allowed five states to raise additional Rs 9,913 crore through open market borrowings (OMBs).

The nod comes as Andhra Pradesh, Telangana, Goa, Karnataka and Tripura implemented the ‘one nation, one ration card’ reform, a condition set by the Centre to enable states to borrow extra.

Karnataka can now borrow additional Rs 4,509 crore, while Andhra Pradesh can raise Rs 2,525 crore, followed by Telangana at Rs 2,508 crore. Goa has been allowed to mop up Rs 223 crore from markets and Tripura Rs 148 crore.

In view of the unprecedented Covid-19 crisis, the Union government had in May allowed states to go for additional borrowings of up to 2 per cent of their gross state domestic product (GSDP) for 2020-21. This will make Rs 4.27 trillion available to the states.

Half of this could be raised subject to implementation of the four specific state level reforms, where the weighting of each reform is 0.25 per cent of GSDP. These reforms are implementation of ‘one nation, one ration card’ system; ease of doing business reform; urban local body and utility reforms, and power sector reforms.

The remaining additional borrowing limit of 1 per cent was to be released in two installments of 0.50 per cent each — first immediately to all the states, and the second on undertaking at least three out of the above mentioned reforms.

The Union government has already granted permission to states to raise the first 0.50 per cent as OMB in June 2020. This made an additional amount of Rs 1.06 trillion available to the states.

Normally, states can borrow to the point that their fiscal deficit does not cross 3 per cent of their GSDP. However, due to coronavirus-induced lockdowns and the resultant effect on economic activities, states finances have been in the doldrums.

According to an analysis by Motilal Oswal Institutional Equities, receipts of 14 states declined 18.2 per cent during the first quarter of 2020-21 on a yearly basis, while spending grew just 2.7 per cent. Details suggest the states’ tax receipts (including the Centre’s devolution) fell 32.1 per cent and non-tax revenues declined 27 per cent in this period.

Besides, they have still not got GST compensation even as five months have already passed in 2020-21 (FY21).

Of the above five states, Karnataka has GST compensation requirement of Rs 13,763 crore, Andhra Rs 4,627 crore, Telangana Rs 5,424 crore, Goa Rs 987 crore and Tripura at Rs 259 crore for the first four months of FY21.

The finance ministry has estimated a Rs 2.35-trillion gap in the compensation requirement and compensation cess collection this year. For meeting this gap, it gave two options to the states — Rs 97,000-crore RBI window or Rs 2.35-trillion borrowings. As many as 21 states have opted for the first option, according to finance ministry sources. This would give enough strength to the finance ministry in the GST Council to pass this decision.

However, experts peg compensation requirements of states at much higher than finance ministry’s projections. For instance, ICRA has estimated the gap at Rs 2.92 trillion.

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