Centre raises borrowing limit of states from 3 pc of GSDP to 5 pc in FY21

NEW DELHI: The Centre increased the borrowing limit of states to 5% of gross state domestic product (GSDP) in 2020-21 from 3%, a move that will make an additional Rs 4.28 lakh crore available to them. However, incremental borrowing beyond 3.5% of GSDP will be linked to reforms undertaken by the states, including universalisation of ‘One Nation, One Ration card,’ ease of doing business and power distribution reforms, besides steps recommended by the 15th Finance Commission.

“To promote state-level reforms, part of the borrowing will be linked to specific reforms like increasing job creation through investment and promo ting urban development, health and sanitation,” finance minister Nirmala Sitharaman said on Sunday, while announcing the higher borrowing for states as the fifth and final tranche of the Centre’s Rs 20 lakh crore economic stimulus package.

Total borrowing by states can climb to over Rs 10 lakh crore with net borrowing for 2020-21 at Rs 6.41 lakh crore, based on 3% of GSDP.


Of the additional borrowing, the first 0.5% will be unconditional, while the next 1% will be in four equal tranches, each linked to clearly specified, measurable and feasible reform action. The remaining 0.5% will be given if milestones are achieved in at least three out of four reform areas.

A specific scheme will be notified soon on the pattern, she said. "An increase in the states’ borrowing limit will help to absorb the expected plunge in their revenue receipts, and avoid a severe cutback in capital expenditure," said Jayanta Roy, group head -corporate sector rating, ICRA.

The Centre has already hiked its planned borrowing for 2020-21 by 54% to Rs 12 lakh crore from Rs 7.8 lakh crore estimated earlier for Covid-19-related emergencies.