Reform-linked borrowing by states new model of public finance: PM Modi

Prime Minister Narendra Modi on Tuesday said that the new model of public finance, where states were allowed to exceed their annual borrowing limits in 2020-21 only if they undertook certain pre-specified reforms, is a classic example of the new model of ‘reforms by conviction incentives.’

In a blog posted on LinkedIn, Modi said India has seen a model of “reforms by stealth compulsion.” This is a new model of “reforms by conviction incentives.”

“This was a nudge, incentivising states to adopt progressive policies to avail additional funds. The results of this exercise are not only encouraging but also run contrary to the notion that there are limited takers for sound economic policies,” Modi wrote in the blogpost.

Citing the example of four reforms, which state governments had to undertake to become eligible for the additional 1 per cent borrowing, Modi said each of the reforms was linked to improving Ease of Living for the public, mainly the poor, the vulnerable the middle class. It also promoted fiscal sustainability.

“Raising enough resources for public welfare while ensuring sustainability is proving to be one of the biggest challenges,” the Prime Minister said.

He added states were able to raise an extra Rs 1.06 trillion in 2020-21 by an approach of Centre-State ‘Bhagidari’.

“Officials who have been working on these reforms suggest that without the incentive of additional funds, enactment of these policies would have taken years,” Modi said.

Elaborating on the first report, which is One Nation One Ration card, Modi said that the main benefit of this is that migrant workers can draw their food ration from anywhere in the country.

“Seventeen states completed this reform were granted additional borrowings amounting to Rs 37,600 crore,” the Prime Minister said.

On the second reform linked to additional borrowings, which is aimed at improving Ease of Doing Business, Modi said this reform (covering 19 laws) is of particular help to micro, small medium enterprises (MSMEs). This is because these enterprises suffer the most from the burden of ‘inspector raj’.

It also promotes an improved investment climate, greater investment faster growth.

Twenty states completed this reform were allowed additional borrowings of Rs 39,521 crore.

The third reform required states to notify floor rates of property tax of water sewerage charges. This was in consonance with stamp duty guideline values for property transactions current costs in urban areas.

“Eleven states completed these reforms were granted additional borrowings of Rs 15,957 crore in 2020-21,” Modi said.

The fourth reform was the introduction of direct benefit transfer (DBT) in lieu of free electricity supply to farmers.

Additional borrowing of 0.15 per cent of the gross state domestic product (GSDP) was linked to this. A component was also provided for reduction in technical commercial losses another for reducing the gap between revenues costs (0.05 per cent of GSDP for each).

Thirteen states implemented at least one component while six states implemented the DBT component. As a result, Rs 13,201 crore of additional borrowings was permitted.

Overall, 23 states availed of additional borrowings of Rs 1.06 trillion out of a potential of Rs 2.14 trillion.

“As a result, the aggregate borrowing permission granted to states for 2020-21 (conditional unconditional) was 4.5 per cent of the initially estimated GSDP,” Modi wrote.

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