Centre raises borrowing limit for states by 50 bps

The central government today announced a relaxation in borrowing norms for states, allowing them to borrow up to an additional Rs21,000 crore in the current fiscal, to deal with the economic slowdown.

The union cabinet today approved the relaxation of the Debt Consolidation and Relief Facility (DCRF) guidelines, enabling states to borrow up to 4 per cent (against 3.5 per cent earlier) of their respective gross state domestic product (GSDP) during 2009-10.

The states will not lose the benefits of DCRF, provided they are in compliance with this modified fiscal deficit target. The states will have to suitably amend their respective fiscal responsibility legislation if so required. The ministry of finance would write to the 13th Finance Commission to make appropriate adjustments.

The union finance ministry used to fix the annual borrowing ceilings for states largely in accordance with the fiscal deficit targets recommended by the Twelfth Finance Commission and accepted by the government.

The centre had earlier relaxed the 3 per cent ceiling on states borrowings to 3.5 per cent for 2008-09, in response to the current economic slowdown. Subsequently, it was decided to extend the relaxation in the fiscal deficit target of the states to 2009-10 in order to spur infrastructure development and employment generation through increased public investment.

In the backdrop of the limited fiscal space because of reduction of Cenvat and service tax rates, the government had substantially hiked the gross budgetary support for the annual plan 2009-10.

Bulk of this increased support is to be directed toward public investment infrastructure and hence the additional borrowing space of 0.5 per cent of the state GSDP.

This will go a long way in reversing the impact of economic slowdown and accelerate the revival of growth in the medium term, the release added.