Tying centre and state pockets

Context – Centre has enhanced borrowing limit of state with conditions. The policy needs to be analised as capacity to undertake reforms varies from state to state.

Government has linked enhanced borrowings with implementation of reforms in four key areas:

• One nation-one ration card: Reforms like Free grains, pulses, cash transfer, applicability of ration card across states will require suitably designed IT system with Aadhar Linking. 

• It will also involve organising supply chain and inventory management.

• Ease of Doing Business: Reform needed in giving permits, approval for land, electricity and water connections or registering a business.

• Reforms in Power Sector: Need political courage to dispense with free power to farmers and patronising power theft. 

• States must also address unsustainable outstanding dues of distribution utilities

• Urban Local Bodies: Good source of revenue by Property Tax, by vacant land. Municipal Bond can be good option for revenue.

State Finances

• Under Centre’s control: Little leeway in fiscal expansion and cannot borrow above a limit without the permission of Centre.

• Temporary liquidity facility: RBI has raised the limits to the ways and means advances (WMA).

• Borrowing Limit: increased to 5% of GSDP (Gross State Domestic Product) from 3% earlier but due to high cost of borrowing it may not help fiscally weak states.

Suggestions

• Government of India should on-lend its market borrowing to states. Centres fiscal deficit will rise but combines fiscal deficit will not rise.

• State and Centre must not curtail development expenditure as it will weaken the economy.

• Central Government can borrow without crowding out fund for private investment as non-government sector is less prone to invest now.

• Investment in public health infrastructure must be priority.