Maharashtra and West Bengal were the largest among the five states that didn’t avail additional borrowing linked to institutional reforms that were announced by the central government as part of the Aatmanirbhar Bharat package last year. The central government had told the states that they could borrow up to an additional one percent of their gross state domestic product (GSDP) if they implemented reforms related to ease of doing business, improving power sector finances etc.
Overall, 23 states were given permission to borrow a cumulative Rs 1.06 lakh crore out of a possible Rs 2.14 lakh crore. Apart from Maharashtra and West Bengal, Jharkhand, Mizoram and Nagaland did not avail of this scheme.
To be sure, these states could have theoretically implemented these reforms, but might have chosen not to avail the additional borrowing, said government sources. Under fiscal rules, state governments are allowed to borrow up to 3 percent of GSDP.
However, in the pandemic year, the Centre allowed states to borrow an extra 2 percent of GSDP. Of this increase, 0.5 percent was unconditional, 1 percent linked to four areas of critical reforms – with each carrying a weightage of 0.25 percent, and the last 0.5 percent permitted if states achieved at least three of the four targets.
Kerala, Uttarakhand and Rajasthan were the only states to tick the boxes on all the reforms.
The four areas of reforms
The first set of reforms that the Centre wanted the states to implement was the one nation one ration card (ONOR) scheme. Under this, states were to seed all ration cards with Aadhaar and ensure that all ration shops were equipped with an electronic point of sale machine. Seventeen states executed this and were permitted to borrow up to Rs 37,600 crore.
Second, the government wanted states to improve the ease of doing business by allowing automatic renewal of certain licences online, and without any discretion. They were to also institute steps to prevent harassment by inspectors of shops and establishments. Twenty states took these steps and allowed additional fundraising of Rs 39,512 crore.
Third, states had to institute a minimum rate of property tax and prod municipalities to charge for water and sewerage services. Eleven states did this and were allowed Rs 15,957 crore.
Fourth, in what’s possibly the toughest reforms for states politically, they had to cut free power to farmers and replace this with direct benefit transfers (DBT) of subsidy. States also had to reduce technical losses of power and reduce the revenue-cost gap. Fifteen states qualified with a DBT policy although 8 of them did not give free power to farmers. These states were allowed to borrow up to Rs 13,201 crore on this account.
These four tranches add to a total of Rs 1.06 lakh crore.
The way forward
It is not clear how much the states actually borrowed from the permitted Rs 1.06 lakh crore. The Centre’s scheme allowed the states to borrow later too. For the current financial year, states are allowed to borrow up to 4 percent of GSDP as recommended by the Fifteenth Finance Commission. They have also been allowed to borrow an additional 0.5 percent if they complete some power sector reforms.