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Journalism of Courage
The Centre will set the borrowing limit for states in FY24 at 3.5% of gross state domestic product (GSDP), including 50 basis points linked to power sector reforms. This is in sync with the fiscal path recommended by the 15th Finance Commission (FC).
While some states have demanded a higher ceiling for next year, officials said the Centre would rather stick to the fiscal consolidation path, as the Covid-induced higher borrowings under by states under increased limits in FY21 and FY22, raised their debt levels. Of course, all states did not exhaust the additional borrowing space even during the Covid period.
In the pre-budget meeting with union finance minister Nirmala Sitharaman on November 25, Bihar Finance Minister Vijay Kumar Choudhary said the borrowing limit for states should be at 4% of GSDP for another year. The Centre has set the borrowing limit at 3.5% of GSDP for FY23 with another 50 bps window if states carry out reforms in the power sector, taking the total space to 4%. Tamil Nadu has also sought a higher borrowing limit for the next fiscal.
For states, the FC had recommended a fiscal deficit limit of 4% for FY22, 3.5% in FY23 and 3% during FY24-26. If a state is unable to fully utilise the sanctioned borrowing limit during the first four years (FY22-FY25), it could avail the unutilised borrowing amount in subsequent years (within FY22-FY26).
Extra annual borrowing worth 0.5% of GSDP was recommended for states during the first four years (FY22-FY25) upon undertaking power sector reforms. The reforms include a reduction in operational losses, revenue gap, payment of cash subsidy by adopting direct benefit transfer and tariff subsidy as a percentage of revenue.
The objective was to aid states to bridge the resource gap due to the adverse impact of Covid-19 on their revenues as well as to improve the quality of expenditure.
Except in FY10, FY16 and FY17, states had maintained their combined gross fiscal deficit below the Fiscal Responsibility and Budget Management (FRBM) ceiling of 3% of GDP till FY20. The overshooting of the deficit in FY10 was due to the response to the global financial crisis, whereas the implementation of Ujwal DISCOM Assurance Yojana (UDAY) was responsible for higher deficit in FY16 and FY17. In FY21, the states combined fiscal deficit came in at 4.2% and is estimated to be around 3.5% in FY22.
It has been observed that many states prefer to borrow less (Odisha did not borrow in FY22) and try to revert to their normal borrowing pattern below 3% of their respective GSDP to keep interest costs in check.
The aggregate debt of states touched a 15-year high of 31.1% of GDP in FY21.
