Money & Banking

Need to devise better formula for setting States’ borrowings, says SBI report

Our Bureau Mumbai | Updated on August 03, 2021

Better-behaved States may be rewarded in terms of increase in size of permissible borrowing, it says

There is a need to devise a better formula for setting States’ borrowings and delink it from advance Gross State Domestic Product estimates, stated the State Bank of India’s economic research report, “Ecowrap”.

Referring to the Finance Commission’s (FC) recommendation that borrowings by States should be linked to the size of the GSDP, SBI’s economic research department observed that given the borrowings incentivisation, it also resulted in States projecting ambitious GSDP numbers during the budget presentations that are only revised downwards later.

“As a logical corollary, States get access to higher advance borrowing based on their higher GSDP Budget Estimate (BE) projections,” it said.

“Certain States including West Bengal, Maharashtra, Andhra Pradesh, Chhattisgarh, Uttar Pradesh, Tamil Nadu and Rajasthan have borrowed higher than 3 per cent of their actual GSDP in either or all the years ending FY21,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI.

He underscored that even if the additional borrowing conditions set by the FC are considered for the years, the trend is only getting broad-based.

Recommendations

The report recommended that States that are better-behaved may be rewarded in terms of an increase in size of the permissible borrowing in the subsequent year where permissible borrowing is scaled up by the lower advance borrowings.

“This scale-up can also come at a rate lower than market rate of interest,” Ghosh said.

The report suggested that a similar scheme could be envisaged for States that are borrowing more, with a scale-down in the permissible borrowing or the higher advance borrowings may be resorted to only at a rate that is higher than market rate of interest.

Another possible solution could be linking of the State borrowing to its own tax revenue. Such conditional limit on State borrowings finds echo in 15th Finance Commission recommendations also, the report said.

According to Ecowrap, in FY22, based on the 15th Finance Commission’s recommendation, the Centre had allowed States net market borrowing of up to 4 per cent of GSDP, additional 0.5 per cent of GDP conditional borrowing on fulfilment of power sector reforms.

Besides, the total amount of grants given to local bodies has increased. Of the ₹2.2 lakh crore grants permitted for FY22, ₹1.54 lakh crore is unconditional and the remaining ₹67,105 crore for local bodies is conditional and based on reform of urban local bodies, the report said.

Devolution to States

As per Ecowrap, the fiscal situation as of now looks promising even with the added expenditure that the Government has recently announced. It is only the disinvestment figures which could be undershot, it added.

Referring to the Centre’s net tax collections at ₹5.58 lakh crore for Q1FY22, the report said the Q1FY22 tax collections are 36 per cent of the budgeted tax collections. This figure used to be around 26-29 per cent in the previous years.

The Centre has budgeted ₹6.66 lakh crore as the States’ share in the tax collections.

With improvement in direct tax collections, it is expected that Centre will be able to provide this amount to States, thereby, helping them manage their finances better, the report said.

In the last fiscal, the Centre had budgeted ₹7.84 lakh crore, while it could only provide ₹5.5 lakh crore to them, it added.

Published on August 03, 2021

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