The state governments can borrow an additional Rs 4.28 lakh crore in 2020-21 as the Centre acceded to their demand for an increased borrowing limit from 3% to 5% of the Gross State Domestic Product (GSDP).
As per the earlier limits, the state governments could have borrowed Rs 6.41 lakh crore, and now with the increased borrowings limits the states can now raise up to Rs 10.7 lakh crore.
The new extra borrowing limit though comes with some conditions. While the states can borrow up to 3.5%, or around Rs 7.5 lakh crore without any condition, the next 150 bps of the borrowing limit is subjected to certain conditions.
After 3.5% of the GSDP, the next 100 bps of the borrowing has to be linked to clearly specified, measurable and feasible reform actions. These reforms are -- universalisation of 'One Nation One Ration Card', improvement of ease of doing business, power distribution and urban local body revenues.
The next 50 bps of the borrowing will depend on achievement of three of the four reforms mentioned earlier.
Commenting on the Centre's move, TS Singhdeo, commercial tax and health minister of Chhattisgarh, told Business Today: "This is arm twisting not federal structure. You take away (state') fiscal freedom one after the other -with a major portion subsumed with the GST --and whatever is left, you are taking under the control of the central governments. You are dictating policy to states for allowing them borrowing limits which is not acceptable."
Meanwhile, Union finance minister Nirmal Sitharaman, while announcing the increased borrowing limits, said the states have only availed 14% of the existing borrowing limit of Rs 6.41 lakh crore.
When asked why states have so far availed only 14% of the existing borrowing limit, TS Singhdeo said that this is only the second month of the financial year, the limit is for the whole year, and states would borrow as and when required.
Apart from the government enhancing the states' borrowing limit, the Reserve Bank of India (RBI) had earlier raised the limits of the Ways and Means Advances (WMA) to states by 60%. The states can borrow an additional Rs 19,335 crore at a much lower rate. Under WMA, states can access short-term funds at a the rate of interest same as repo rate. At present the repo rate is 4.4%.
This is very cheap compared to State Development Loans (SDLs), which have much higher yields.
The average yields on SDLs are around 8-9%. Kerala had in April raised over Rs 6,000 crore through SDLs at 8.96%. TS Singhdeo told Business Today that Chhattisgarh recently borrowed from NABARD at 8.2%, which he says is very high when compared to repo rate of 4.4%. He says that in times like these, government agencies and banks should have a limit on how much interest they charge from states.