States allowed to borrow up to 4 per cent of GSDP in FY'10

The centre has relaxed the fiscal deficit target for states for the 2009-10 financial year from 3 per cent to 4 per cent of their respective gross state domestic product, enabling them to borrow up to 4 per cent of their GSDP.

The centre had, in January this year, issued relaxed debt issue guidelines under the Debt Consolidation and Relief Facility (DCRF) for states to undertake capital expenditure.

The debt relief guidelines, issued under the second stimulus package aimed at boosting the economy, allows states to borrow an additional Rs30,000 crore to step up capital expenditure.

States would be able to borrow an additional 0.5 per cent of their GSDP, amounting to Rs30,000 crore, for capital expenditure without losing the debt relief benefits recommended by the Finance Commission.

The finance ministry could also allow states to borrow an additional 0.5 per cent of GSDP over and above 3.5 per cent, for undertaking capital expenditure.

The Twelfth Finance Commission had recommended the DCRF over the period 2005-10. The scheme has two components:

• Consolidation of central loans contracted till 31 March 2004 and outstanding as of 31 March 2005, and
• Provision of interest relief and grant of debt waiver to states based on their fiscal performance.

Consolidation of central loans has given interest relief to states. Debt waiver is granted to states based on their fiscal performance, for which an assessment is made annually, minister of state for finance Namo Narain Meena informed the Rajya Sabha in a written reply.
 
Benefits under DCRF helps states by easing debt and interest pressures, and also incentivises them to follow the path of fiscal correction. This has facilitated the states to focus investment on development, the minister added.
 
Higher borrowings on account of relaxation of fiscal deficit target for 2009-10 will enable states to commit funds for capital expenditure, which will help in accelerating the growth revival in the medium term.