Front-loading: Centre allows states to borrow 75% of their annual limit in April-December
Given the revenue constraints and an evolving Covid-19 situation, the Centre has allowed the state governments to borrow 75% of their annual market borrowing limit of 4% of their respective Gross State Domestic Product (GSDP) in the first nine months of the current fiscal, a senior finance ministry official told FE. This compares with the permission given to them to borrow up to 50% of the annual threshold in the year-ago period.
Coupled with the central government securities, the state development loans could boost supplies, leading to hardening of bond yields in the coming few months, unless the RBI steps up open market operations, analysts feel.
The idea behind the Centre’s move is to enable states, which had bucked the trend in the last fiscal by reporting an year-on-year decline in capex, to regain spending momentum, even as they meet the rising spending commitments arising from the spike in Covid cases.
Conventionally, the states’ borrowing used to be capped at 3% of GSDP or thereabouts, and the bulk of the borrowings occurred in the second half a fiscal year.
According to the source, the Centre has also mandated that states must spend 50 bps of the 4% unconditional market borrowing limit for the current fiscal year, on ‘incremental capital expenditure’ to improve the quality of spending.
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