The Centre has raised the borrowing limits of states to 5 per cent of their gross domestic product (GDP) but the allowance has come with strings attached.

States will have to meet strict conditions laid down by Union finance minister Nirmala Sitharaman on Sunday to be able to tap the extra pool of resources which they have sought to meet the increased expenses on account of virus outbreak amid vanishing revenue.

The states will be at liberty to borrow an additional 0.5 per cent only with no strings attached beyond 3 per cent of the annual ceiling permitted now, according to the FRBM Act.

The net borrowing limit of the states stands at Rs 6.41 lakh crore for 2020-21, before the proposed hike.

“The chief ministers have written to the Prime Minister, finance ministers wrote to me, please increase our borrowing limit. We have now agreed to increase this to 5 per cent. Because it is an unprecedented situation, we have acceded to the demand of the states,” Sitharaman said while announcing the last phase of the fiscal measures.

According to the formula laid down by FM, states need to undertake reforms in four areas and take actions as per central requirement to unlock 1 per cent additional borrowing over and above 3.5 per cent allowed unconditionally.

The sectors mentioned by the minister include a “one nation one ration card” scheme, ease of doing business at the district level, reforms with power distribution companies and the revenue generation of urban local bodies.

“We will release in four tranches of 0.25 per cent each…Each of those tranches will be linked to a clearly specified measurable and feasible reforms actions to be taken,” she informed, adding that a further 0.5 per cent would be released when milestones are achieved in at least three out of four areas.

“We want to make sure that the poor get benefited from all the money being borrowed,” the FM added, explaining the rationale of attaching conditions. If all states manage to hit the targets, an additional Rs 4.28 lakh crore resources would be available to the states.

Bengal response

State finance minister Amit Mitra, one of the strongest voices seeking additional borrowing limit, lashed out at the conditional approval as yet another assault on the federal structure of India.

He pointed out reforms demanded to be undertaken by the Centre have no link to the extraordinary situation emerging out of Covid-19 and the conditional approvals are extraneous as states anyway need NOC from the Centre every time they borrow.

“This is crushing federalist polity of India in steady and strategic manner where the diktat of the Centre will be the order of the day and the elective representatives of the people in the states will have no choices,” Mitra told The Telegraph.

An additional 2 per cent borrowing headroom would have brought Rs 24,000 crore extra loan to Bengal which has generated only 13 percent of own revenue in April.

He rebutted Sitharaman’s insinuation that states have only borrowed 14 per cent of what has been already allowed (within the existing ceiling) so far. “How are we to run the state in the second half of the year if we borrow everything now? It is evident the state’s own revenues will not reach normal levels even then,” Mitra retorted.

Sudipto Mundle, who was a member of 14th Finance Commission, condemned the proposal of putting conditions while giving emergency relief to the states. “This suspicion and bias that states are not as responsible as the Centre, I find it very disappointing,” Mundle said in a TV show.