News Analysis

Rise in borrowing cap: Will States use additional ₹1.07-lakh crore for direct cash transfer schemes?

Rajalakshmi Nirmal | Updated on May 18, 2020 Published on May 18, 2020

Sharp drop in VAT and excise revenues, higher healthcare expenses may persuade them otherwise

On Sunday, Finance Minister Nirmala Sitharaman, heeding to the repeated requests of Chief Ministers, permitted States to borrow up to 5 per cent of their GSDP for FY21 — against the current borrowing cap of 3 per cent — releasing additional resources of ₹4.28-lakh crore.

While all the additional borrowings cannot be put to use as States desire, 0.5 per cent of the GSDP (gross state domestic product) is available unconditionally; this works out to ₹1.07-lakh crore. This is more than the ₹75,000 crore which the Centre has budgeted for FY21 to be spent on PM-KISAN.

States, if they want, can use this funding tap opened by the Centre to announce a direct income transfer scheme.

Since the beginning of the lockdown, there has been a cry across social media for a cash transfer scheme. A cash/income transfer scheme is not going to be new for States — some already have such schemes running for their farmers.

In FY19, an income support scheme for farmers was announced for the first time, by Telangana. The next fiscal, per government records, six States — Andhra Pradesh, Haryana, Jharkhand, Karnataka, Odisha, Telangana and West Bengal — had budgeted a total of ₹32,861 crore for income transfer schemes for farmers. This came to 0.2 per cent of their collective GSDP.

How much for migrants?

Now, if ₹1.07-lakh crore is to be distributed, how much will it translate into income on hand?

If it is going to be split among migrant labourers, the count of which is approximately 8 crore, each individual will get ₹13,375. If States want to include all BPL (below poverty line) families under the scheme, the benefit paid per individual may be lower.

That said, it needs to be noted that the countrywide lockdown since March and the resultant hit on economic activities have seen cash flows dry up completely for States. They have witnessed a drop in the collection of VAT (mainly on petroleum and diesel) and State excise (on liquor) and also on stamp duty and registration fees on property sales. A report of India Ratings & Research points out that while about 40 per cent of the economy was functional even during the lockdown as activities defined as ‘essentials’ were allowed, and some amount of revenue did accrue, States faced a significant revenue loss in April.

Thus, the States may want to use the additional liquidity available for their various Covid-19 relief measures, and not necessarily on cash transfer schemes.

Fiscal health of States

States have been seeing their revenue growth slow down over the recent years. Per the RBI’s State Finances Report, the revenue receipts of States are likely to have grown at a slower pace in FY20 compared to the previous two fiscals. This is due to a drop in the rate of growth in both States’ own revenue (taxes including SGST and interest/dividend receipts) and Central transfers.

Capital receipts — made primarily of market borrowings — have increased sharply. Market borrowings as a percentage of GSDP have increased from 1.9 per cent in FY16 to 2.3 per cent of GSDP in FY20 (budgeted). Note that most of the States and Union Territories have been excluded from the National Small Savings Fund (NSSF) financing facility from FY17.

That said, States have cut their capital expenditure sharply and kept the GFD-GSDP (GFD is gross fiscal deficit) ratio within the limits of the Fiscal Responsibility and Budget Management Act (FRBM) Act. Under the FRBM Act, States are mandated to keep their fiscal deficit under 3 per cent of their GSDP.

Per the budgeted numbers for FY20, the GFD-GSDP ratio comes to 2.6 per cent, against the revised estimate of 2.9 per cent in FY19 and 2.4 per cent in FY18 (actuals).

Rise in outstanding debt

However, the outstanding debt of States has risen over the last five years and is likely to be at 25 per cent of GSDP for FY20, per the RBI’s State Finances Report, posing medium-term challenges to its sustainability. The FRBM Act prescribes a debt-to-GSDP ratio of 20 per cent for States.

The total outstanding liabilities of States in FY20 was ₹52.5-lakh crore, up from ₹27.03-lakh crore in FY15. In this period, the debt-to-GSDP ratio increased from 21.7 per cent to 24.9 per cent.

The States that have a substantially lower debt-to-GSDP ratio and have more room to announce cash transfer schemes include Gujarat (19.2 per cent), Assam (18.9 per cent), Karnataka (18.7 per cent), Maharashtra (16.9 per cent) and Telangana (17 per cent).

Published on May 18, 2020

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.