After govt hikes market borrowing limit, states redraw their road maps

Meanwhile, states such as Bihar have not felt the need to borrow from markets at all so far, but will opt for it in a month or two.
Following the Centre’s decision to hike market borrowing limit, albeit conditional, states are busy redrawing their calendar to overcome the economic downturn amid lockdown due to the Covid-19 pandemic.

Finance Minister Nirmala Sitharaman had reminded that the states were authorised to borrow 75 per cent of their authorised limit (3 per cent of their respective gross state domestic product) but they had borrowed only 14 per cent of it by May 14.

States such as Kerala have front-loaded borrowing to meet their committed liabilities, including salaries, and are going to rely on meeting the four conditions to borrow the extra 2 per cent this year.

On the other hand, states such as Assam are looking to first exhaust their ways and means advances and special drawing rights before going to the market due to the large interest rate differential.
Meanwhile, states such as Bihar have not felt the need to borrow from markets at all so far, but will opt for it in a month or two.

The Union government has allowed states to borrow till their fiscal deficit hits 5 per cent of their respective gross state domestic product (GSDP). However, they are allowed to tap the market borrowings unconditionally till their fiscal deficit reaches 3.5 per cent of GSDP. 

Beyond that, they have to meet four parameters — One Nation One Ration Card, ease of doing business, power sector reforms, and urban local body reforms — for availing an extra 0.25 per cent against each of the parameters. If they meet three of these parameters, they can also avail market borrowings till their fiscal deficit reaches an additional 0.5 per cent of GSDP. 


Kerala has already borrowed Rs 9,000 crore so far, which is 70 per cent of what it is eligible to borrow for the full fiscal year at Rs 13,000 crore. With the additional 2 per cent additional borrowing allowed,  Kerala Finance Minister Thomas Isaac said it would meet the conditions laid down to borrow additional 2 per cent, which comes to over Rs 8,000 crore.
“While states are being very careful with borrowing, Kerala has already borrowed Rs 9,000 crore and paid a high rate of interest of 9 per cent for Rs 6,000 crore we borrowed. It was important for us to do the frontloading, as we have to make transfers to people affected by the lockdown, besides paying salaries,” he said.

While Isaac said the state would try to meet the conditions to do the extra 1.5 per cent borrowing, he also criticised it, saying it sets a wrong precedent. “This time the conditions are not severe, which may not be the case in the future. It is a bad precedent to have the conditions in the first place,” he said.

Kerala is expecting a contraction of 15 per cent in the GSDP this fiscal.

Meanwhile, Assam has so far borrowed Rs 500 crore from the market but it is relying more on ways and means advances to meet its spending requirement. 

“We are entitled to borrow Rs 12,000 crore and another Rs 2,000 crore without any conditions. For the conditional borrowing, the reforms are not tough so we plan to borrow the entire amount,” said Assam Finance Minister Himanta Biswa Sarma. 

After the conditions were imposed, West Bengal Finance Minister Amit Mitra had said the additional borrowing was another smokescreen.

“Every time we go to the market to borrow, the Centre has to okay it. So, where is the need to attach conditions? This is being done to undermine the states,” Mitra alleged.

He said the ways and means advances come at a 3 per cent rate on interest, whereas market borrowing at 7 per cent. “Most states will first try to exhaust the ways and means advances window before going to the market,” he said.
However, states such as Bihar have said they will opt for the option as and when the need arises. “This is just the second month of the fiscal year. States that are badly governed are the ones frontloading the borrowing and cutting salaries. We will take a loan when we need it,” said Bihar Deputy Chief Minister Sushil Kumar Modi.

Bihar lost out on 82 per cent of its revenue  as it fell to Rs 450 crore in April, compared to the same month last year's. 

Punjab is planning to borrow Rs 5,300 crore in the first quarter itself, about a third of its borrowing limit for the fiscal year to meet its committed spending such as salaries, pensions, and interest payments.
Experts criticised the Centre’s decision to put conditions on states for borrowing. 

Govinda Rao, former director at the National Institute of Public Finance and Policy, said these conditions set a precedent about imposing conditions on states borrowing.  “They (states) are borrowing from the market, you (the Centre) are not the one who is lending. It has never happened in the history of India that conditions were imposed for somebody to borrow. While Article 293 (4)) allows the Centre to do so, the point is that it never happened in the past. These conditions may be desirable. But, this sets a precedent. The Centre can impose any conditions now,” said Rao.

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