Centre’s new incentive scheme for States to achieve their targets and become eligible for incremental borrowing

What is the News?

The Finance Ministry had announced a new incentive scheme for States that could achieve their targets and become eligible for incremental borrowing.

What is the Incentive Scheme for States to become eligible for incremental borrowing?

Under the scheme, out of the Net Borrowing Ceiling(NBC) of 4% of GSDP for the States for 2021-22, 0.50% of GSDP was earmarked for incremental capital expenditure to be incurred by the States during 2021-22. 

The target for incremental capital expenditure for each state to qualify for this incremental borrowing was fixed. 

As per the targets, States were required to achieve at least 15% of the specified capital expenditure target for 2021-22 by the end of 1st quarter of 2021-22, 45% by the end of 2nd quarter, 70%  by the end of 3rd quarter and 100% by 31st March 2022.

This earmarking for incremental capital expenditure has been done because the capital expenditure has a high multiplier effect, enhances the future productive capacity of the economy, and results in a higher rate of economic growth.

In the first quarter, only 11 states had achieved the target, and hence they were granted additional borrowing permission.

Why do states need the centre’s permission while borrowing? 

Article 293(3) of the Constitution states that “A State may not without the consent of the Government of India raise any loan if there is still outstanding any part of a loan which has been made to the State by the Government of India or by its predecessor Government or in respect of which guarantee has been given by the Government of India or its predecessor Government”.

Article 293(4) says that the “consent under clause (3) may be granted subject to such conditions as the Government of India may think fit to impose”. 

Since, every single state is currently indebted to the Centre and thus, all of them require the Centre’s consent in order to borrow.

Source: This post is based on the article “Centre’s new incentive scheme for States to achieve their targets and become eligible for incremental borrowing” published in PIB on 13th Dec 2021.