In a Tight Corner
States finally have headroom to borrow more from the market. But there's a cost to it
- May 27, 2020,
- Updated May 28, 2020 9:37 AM IST
The road to fiscal consolidation is never easy. It is, in fact, fraught with serious economic consequences.
For instance, the Centre's fiscal deficit was 2.5 per cent of gross domestic product (GDP) just before the global financial crisis hit the world in 2008. Government stimulus pushed it to a high of 6.5 per cent in FY10. It took almost a decade to bring it to sub-4 per cent - it was 3.33 per cent of GDP in FY20, far higher than the 2.5 per cent in FY08. And there is no likelihood of it coming down to 3 per cent any time soon.
Similarly, the Uday bonds scheme for the power sector - state governments took over 75 per cent of discoms' debt and pay back lenders by selling bonds - actually had a negative impact on states' fiscal position between 2015 and 2017. Their balance sheets are yet to recover from that shock. And there is no chance that they will recover anytime soon.
Under its economic stimulus package to combat the effect of Covid-19, the Centre has increased the borrowing limit for states from 3 per cent to 5 per cent of gross state domestic product (GSDP). This means states can borrow Rs 4.28 lakh crore more to meet Covid expenditure and shortfall in revenues due to the lockdown. But additional borrowing brings in additional risks as well. State governments have to navigate judiciously ahead.
The road to fiscal consolidation is never easy. It is, in fact, fraught with serious economic consequences.
For instance, the Centre's fiscal deficit was 2.5 per cent of gross domestic product (GDP) just before the global financial crisis hit the world in 2008. Government stimulus pushed it to a high of 6.5 per cent in FY10. It took almost a decade to bring it to sub-4 per cent - it was 3.33 per cent of GDP in FY20, far higher than the 2.5 per cent in FY08. And there is no likelihood of it coming down to 3 per cent any time soon.
Similarly, the Uday bonds scheme for the power sector - state governments took over 75 per cent of discoms' debt and pay back lenders by selling bonds - actually had a negative impact on states' fiscal position between 2015 and 2017. Their balance sheets are yet to recover from that shock. And there is no chance that they will recover anytime soon.
Under its economic stimulus package to combat the effect of Covid-19, the Centre has increased the borrowing limit for states from 3 per cent to 5 per cent of gross state domestic product (GSDP). This means states can borrow Rs 4.28 lakh crore more to meet Covid expenditure and shortfall in revenues due to the lockdown. But additional borrowing brings in additional risks as well. State governments have to navigate judiciously ahead.