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Raise FRBM limit to 3.5 percent
Highlights
Telangana State has been requesting the Central Government quite a long time to raise the FRBM\'s limit for the state from 3 per cent of gross state domestic product to 3.5 per cent, on grounds of being a new state, to secure more loans to tide over the present financial crisis and to take care of higher plan outlays.
Telangana State has been requesting the Central Government quite a long time to raise the FRBM's limit for the state from 3 per cent of gross state domestic product to 3.5 per cent, on grounds of being a new state, to secure more loans to tide over the present financial crisis and to take care of higher plan outlays. As per the FRBM Act, a state government can borrow the loans to the extent of 3 percent of its Gross State Domestic Product (GSDP).
Telangana is not the only state asking for such a relaxation. During a pre-Budget meeting with the Union Finance Minister earlier this year, most states had asked for a similar increase in FRBM caps to ensure more liquidity in the markets. As mandated in the FRBM Act, the State Government was required to eliminate Revenue Deficit by 31st March,2009 by reducing it by 0.32 percentage points of GSDP every year. At the same time fiscal deficit had to bring down to 3 percent of GSDP by reducing it by 0.25 points every year.
But, Telangana being a new State and there are a number of issues in realistically estimating the revenue potential of the State. There are huge expenditure commitments in sectors, such as, farm, power, drinking water, irrigation and roads sectors. Because of these reasons, it has not been possible to adhere to the fiscal deficit limit of 3.0 percent of GSDP as prescribed in the FRBM Act.
The 14th Finance Commission in its recommendations mentioned that the states that are revenue surplus can be permitted to access market borrowings at 3.5 per cent of the GSDP by raising the ceiling of 3 per cent as per the FRBM criteria. The State has revenue of surplus of 531 crores as per the budget outlays of 2015-16 and fiscal deficit is Rs.16,969 crores, which is 3.49 percent of GSDP.
The FRBM Act also stipulates to limit the amount of annual incremental risk weighted guarantees to 90% of the total revenue receipts in the year proceeding the current year. In this case also the State Government guarantees are within the limits. The commission has enunciated that Fiscal deficit of all States will be anchored to an annual limit of 3 per cent of GSDP. The States will be eligible for flexibility of 0.25 per cent over and above this for any given year for which the borrowing limits are to be fixed if their debt-GSDP ratio is less than or equal to 25 per cent in the preceding year.
It also pronounced that States will be further eligible for an additional borrowing limit of 0.25 per cent of GSDP in a given year for which the borrowing limits are to be fixed if the interest payments are less than or equal to 10 per cent of the revenue receipts in the preceding year. The two options under these flexibility provisions can be availed of by a State either separately, if any of the above criteria is fulfilled, or simultaneously if both the above stated criteria are fulfilled. Thus, a State can have a maximum fiscal deficit-GSDP limit of 3.5 per cent in any given year.
The flexibility in availing the additional limit under either of the two options or both will be available to a State only if there is no revenue deficit in the year in which borrowing limits are to be fixed and the immediately preceding year. If a State is not able to fully utilise its sanctioned borrowing limit of 3 per cent of GSDP in any particular year during the first four years of our award period (2015-16 to 2018-19), it will have the option of availing this un-utilised borrowing amount (calculated in rupees) only in the following year but within our award period.
The State has urged the Centre to raise FRBM cap because, as per assessment about Rs 8,000 crore are needed for implementing the loan waiver scheme at one go. The state government had already implemented initial phase of loan waiver with Rs 8,336 crores. As per FRBM Act, any Government used to gather money up to 10,500 crores in FY. The government is trying to mobilise funds to the tune of Rs 4,100 crore under commercial tax arrears, about Rs 3,000 crore vis-a-vis FRBM Act, sale of certain lands and through other means.
At present, the outstanding loan of Telangana stands approximately at Rs 67,359 crore. These loans were secured in the undivided state and were distributed between AP and Telangana in the ratio of 58:42. Andhra Pradesh’s loan share is Rs 90,809 crore. Interestingly the Telangana government is trying to secure more loans to pay the interest. However, it is eligible for only Rs 10,500 crore loans this year as per FRBM norms, which state that the debt should not exceed 3 per cent of GSDP.
The existing loans were secured in three ways. The first being sale of bonds through RBI in the open market, the second being loans sanctioned by the Centre and third through external funding agencies like World Bank, JICA etc. The State has also sought a financial package for Telangana State under the Backward Areas Development Programme as promised under the Andhra Pradesh Reorganisation Act.
The State government has sought the assistance to take up ambitious prestigious projects like Water Grid and Mission Kakatiya programme for revival of tanks and for the development of irrigation and drinking water supply and other projects, as these projects needs huge financial assistance. It is time to increase the FRBM limit to Telangana to 3.5 per cent as the state satisfies all the criteria laid down by the finance commission.
By G. Rajendera Kumar
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