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

The Centre has allowed five states to raise additional resources of Rs 9,913 crore in open market borrowings (OMBs).

Andhra Pradesh, Telangana, Goa, Karnataka and Tripura got this permission after they successfully met the reform condition of implementing the One-Nation-One-Ration Card System.

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 pandemic the union government had in May allowed states to go for additional borrowings of up to two per cent of their gross state domestic product (GSDP) for 2020-21. This will make up to Rs 4,27,302 crore available to the states.

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

The remaining additional borrowing limit of one percent was to be released in two instalments of 0.50 per cent each - first immediately to all the states as untied, and the second on undertaking at least 3 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 1,06,830 crore available to the states.

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).

However, due to Covid-19 induced lockdowns and the resultant effect on economic activities, states finances have been in doldrums.

According to an analysis by Motilal Oswal Institutional Equities, the 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.

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 at Rs 987 crore and Tripura at Rs 259 crore for the first four months of the current financial year.

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 of RBI window, according to finance ministry sources. This would give enough strength to the finance ministry in the GST Council to pass this decision, in case of voting.

However, experts peg compensation requirements of states at much higher amount than projected by the finance ministry. For instance, ICRA estimated the total gap at Rs 2.92 trillion.