Federalism: State’s Borrowing conditions altered

FEDERALISM / GOVERNANCE/ ECONOMY

Topic: General Studies 2,3:

• Issues and challenges pertaining to the federal structure, devolution of powers 
• Government policies and interventions for development in various sectors
• Indian Economy and issues relating to planning, mobilization, of resources 

Federalism: State’s Borrowing conditions altered

Context: SpaceX’s The Centre increased the borrowing limit of states to 5% of gross state domestic product (GSDP) in 2020-21 from 3%. However, incremental borrowing beyond 3.5% of GSDP will be linked to reforms undertaken by the states.

Did You Know?

• States borrowing relaxation was the fifth and final tranche of the Centre’s Rs 20 lakh crore economic stimulus package.
• The Centre has already hiked its planned borrowing for 2020-21 by 54% to Rs 12 lakh crore from Rs 7.8 lakh crore estimated earlier for Covid-19-related emergencies
• Total net borrowing by states for 2020-21 stood at Rs 6.41 lakh crore, based on 3% of GSDP
  

What are the conditions insisted by Centre to avail the increased borrowing limit?

• Of the additional borrowing, the first 0.5% will be unconditional, 
• The next 1% will be in four equal tranches, each linked to clearly specified, measurable and feasible reform action. 
• The remaining 0.5% will be given if milestones are achieved in at least three out of four reform areas which are
  • Universalisation of ‘One Nation, One Ration card’(ONOR) Scheme 
  • Improvements in Ease of doing business 
  • Power distribution reforms: States to bring down the aggregate technical and commercial (AT&C) losses and narrow the gap between average cost and average revenues. 
  • Urban Local Bodies – Empowering them with more resources
    

How does the enhanced borrowing limit help States?

• Availability of Additional Capital: This move that will make an additional Rs 4.28 lakh crore available to States
• Addresses Revenue Shortfall: Enhancement of borrowing limit will help to absorb the expected plunge in States’ revenue receipts. 
• Avoid Cut in Capital Expenditure: Due to fixed expenditure on salaries & pensions and on politically sensitive issues like subsidies, a reduction in revenue will eventually lead to cut in infrastructure creation that is not good in long term
• Helps plug the shortfall in Centre’s Devolution: The budgeted Rs 7.8 lakh crore of devolution for FY21 could end up closer to Rs 5 lakh crore, since the Centre’s Rs 24.2 lakh crore target will not be met

• Conditions being insisted upon are more in the nature of reforms

• • Power Sector: Despite UDAY scheme, States did not reform. As a result, currently state electricity boards (SEBs/discoms) owe power-generating firms about Rs 90,000 crore. 
  • Local Governance: Conditions like those on property tax will only help urban local bodies function better since their finances will improve as a result.
  • Migrants: ONOR Scheme and installing PoS machines at Fair Price Shops will ultimately benefit the local population as well as migrants
  • Investment: Condition on ease of doing business norms and the business environment will help attract investment.

Criticism of the measure

• States have alleged that it is unfair for the Centre to set conditions on them in these difficult times.
• The central government penchant to levy ‘cesses’ instead of straightforward taxes in many areas means less has to be shared with the states under the finance commission formula. This has also partly led to inadequate resources with States.
• Hence, going forward Centre should reduce its focus on cesses

Connecting the dots:

• Devolution of powers (legislative, executive, financial)
• Sarkaria Commission and Punchhi Commission