Need to devise a better formula for setting states' borrowings: SBI report

An SBI Research report says 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 or link states borrowing to tax revenues.

“We believe there is a need to devise a better formula for setting state borrowings and delinking it from advance GSDP (gross state domestic product) estimates,” the report released Tuesday said.

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, the report said. Another possible solution could be linking the state borrowing to its own tax revenue, it added.


The report pointed out that the Finance Commission had recommended that borrowings by states should be linked to the size of the GSDP but it often resulted in states projecting ambitious GSDP numbers during budgets that are revised downwards.

“As a logical corollary, states get access to higher advance borrowing based on their higher GSDP BE projections,” it said, noting that certain states including West Bengal, Maharashtra, Andhra Pradesh, Chhattisgarh, Uttar Pradesh, Tamil Nadu and Rajasthan borrowed higher than 3% of their actual GSDP in either or all the years ending FY21.

Market borrowing by states for FY21 shows that Tamil Nadu has the highest share in total market borrowing by states, followed by Uttar Pradesh, Karnataka, Maharashtra, West Bengal and Rajasthan. On the other hand, the northeastern states had a small share in overall market borrowing, the report pointed.