The Centre is unlikely to give in to pressure from states for additional borrowing just yet, as their borrowing calendar has only begun. However, the Centre may consider this demand “at an appropriate time”, sources told CNBC-TV18.

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The Centre has approved approximately Rs 7 lakh crore of borrowing by states in FY21, of which they can raise half (Rs 3.5 lakh crore) immediately. This is 1.5 percent of the 3 percent annual Fiscal Responsibility and Budget Management limit for states. Within the 3 percent FRBM limit for states, the centre is open to giving further flexibility, that is allowing borrowing beyond 50 percent of the full fiscal quantum.

“States had been given a hike in the borrowing limit last year....we will see how this year looks.,” DEA Secretary Atanu Chakraborty said when asked last week if the centre would allow states to expand their borrowing plan for this fiscal.

The Centre allowed states to borrow an additional Rs 58,000 crore in March last year as a special dispensation, to compensate them for lower tax receipts than budgeted.

Looking at the spread of COVID-19 in the country and the ongoing national lockdown, tax revenues are likely to take a major hit this year too, with the Centre viewing April-June as a “write-off” quarter.

This will impact the states’ share of taxes from the Centre, which is the single largest source of income for them. So it is possible that states may yet again be allowed to borrow beyond their FRBM limits in FY21.

Centre’s borrowing calendar

While announcing its borrowing calendar for the first half of next fiscal, the Centre kept its FY21 borrowing limit unchanged at Rs 7.8 lakh crore, but front loaded the programme by proposing to borrow 62.5 percent of the quantum during April-September.

Also read: Centre to allow additional borrowings by states at “appropriate time”, say sources

The Centre has also proposed a higher Ways & Means Advances or WMA limit with RBI of Rs 1.20 lakh crore against Rs 75,000cr during the first half of FY20, and said this will be reviewed on a need basis with the Reserve Bank.

With tax revenues likely to take a major hit right in the beginning of the fiscal, the RBI is allowing both the centre and states larger WMA limits and greater flexibility in repayments if they overshoot the WMA limits.

The Centre and states are likely to rely heavily on these ways and means advances to plug the tax revenue gaps —- until the Centre decides for additional market borrowing.

The Ways and Means Advances scheme was introduced in 1997 to help the government bridge mismatches in its receipts and payments. Under this scheme, the government can avail of immediate cash from the RBI, when required. It has to pay an interest rate same as the existing repo rate and return the amount within 90 days.

First Published:Apr 7, 2020 9:36 AM IST