Imposing conditions on states to borrow more a bad idea: Abhijit Sen

Taking a swipe at the finance ministry, Abhijit Sen says that an idea like this can come from the finance ministry because they (people in the finance ministry) don't have an idea what happens on the ground, they only look at spreadsheet

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Former member of the 14th Finance Commission and economist Abhijit Sen has criticised the Centre for imposing conditions on states for borrowing more at a difficult time like this.

He says the conditions that they have put out are bad in nature. "Most of them have to do with improving ease of doing business, which is difficult to measure. There will be so much confusion on the issue that it cannot be done," he says.

According to him, at the moment states are spending money, and they are frontloading the borrowings.

"So, most of them will exhaust their borrowing limit of 3 per cent in the first half of the year. Now you are saying that you can borrow 2 per cent more, but you have to show that your ease of doing business has to improve. Only two major cities have managed to measure ease of doing business till recently," he says.

Taking a swipe at the finance ministry, he says that an idea like this can come from the finance ministry because they (people in the finance ministry) don't have an idea what happens on the ground, they only look at spreadsheet.

When asked that the conditions have been put out on the recommendations of the 15th Finance Commission, Abhijit Sen says that those limits were in the context of (normal) years and not over few months of massive expenditure.

"I was a member of the 14th finance Commission. We considered the matter of conditionalities, but we finally went against it. If the 15th finance commission is bringing back the conditionality, good luck to them, but they are not putting conditions on a monthly basis," he says.

According to Sen, the 13th finance commission had put a lot of conditions, and (as a result) most of the money was unspent.  "Conditionalities only help the Centre; it prevents money going to the states, and it does very little in achieving the targeted improvements," he added .

He cites the example of multiple conditions imposed by the Centre for Panchayats to get money. "Has working of panchayats improved at all? No. Conditionalities lead to very little positive impact and a lot of negative impacts. Put conditionalities on outcomes, not on processes," he says.

Even as the Centre has accepted the states' demand for an increased borrowing limit of 5 per cent against 3 per cent for the current financial year, it has put conditions on the states to avail the higher borrowing limit.

While the states can borrow up to 3.5 per cent, or around Rs 7.5 lakh crore without any condition, the next 150 bps of the borrowing limit comes with conditions.

After 3.5 per cent 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 above.

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