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

News: The Central Government has increased the borrowing limit of states from 3% of gross state domestic product (GSDP) to 5%.


Key Facts:

  • States have so far borrowed only 14% of the 3% of GSDP limit which is authorised to them while 86% of the limit remains unutilized.However,the limit of states has now been increased from 3% of gross state domestic product (GSDP) to 5%.
  • But part of this borrowing will be linked to specific reforms in four areas: 
    • Universalisation of ‘One Nation One Ration card’
    • Ease of Doing Business
    • Power distribution and 
    • Urban Local Body revenues. 
  • A specific scheme will also be notified by Department of Expenditure on the following pattern:
    • Unconditional increase of 0.50% 
    • 1% in 4 tranches of 0.25%, with each tranche linked to clearly specified, measurable and feasible reform actions
    • Further 0.50% if milestones are achieved in at least three out of four reform areas.

Additional Facts:

Fiscal Responsibility and Budget Management Act(FRBM Act):

  • It was enacted in 2003 to introduce transparency in India’s fiscal management systems by reducing fiscal deficit.
  • The act mandated the reduction of the fiscal deficit to 3% of GDP but it has been subsequently amended and the present target is 3.1% by March 2023.
  • The states have also enacted their own respective fiscal Responsibility Legislation which sets 3% of Gross State Domestic Product(GSDP) cap on their annual budget deficits.