Lok Sabha Question No. 1816 (UNSTARRED), answered on 2016-11-25
Subject: Open Market Borrowings
Ministry: FINANCE
Asked by: SONA RAM CHOUDHARY, BALKA SUMAN, RAYAPATI SAMBASIVA RAO

## GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF EXPENDITURE PLAN FINANCE-I DIVISION

## LOK SABHA UNSTARRED QUESTION NO. † 1816

TO BE ANSWERED ON FRIDAY, THE 25 th  November, 2016/ 4 Agrahayana, 1938 (SAKA)

## Open Market Borrowings

†1816 . COL. SONARAM CHOUDHARY: SHRI SUMAN BALKA: SHRI RAYAPATI SAMBASIVA RAO

Will the Minister of FINANCE be pleased to state:

- (a)  whether  the  Government  proposes  to  give  more  powers  to  the  States  to  improve  their financial status;
- (b) if so, the details thereof and the action taken thereon, State/UT-wise particularly Rajasthan;
- (c) whether the Government keeping with the spirit of cooperative federalism proposes to bring in the transparency and predictability in the Open Market Borrowings (OMBs) by the States by simplifying consent mechanism for OMBs under Article 293(3) of the Constitution; and
- (d) if so, the details thereof and the action taken thereon?

## ANSWER

## MINISTER OF STATE IN MINISTRY OF FINANCE ( SHRI ARJUN RAM MEGHWAL )

(a)  &  (b):  The  subject  matters  on  which  the  laws  can  be  made  by  the  Parliament  and  the Legislatures  of  the  states  are  enshrined  in  Article  246  read  with  Seventh  Schedule  of  the Constitution of India. Further under Article 280 of the Constitution the Finance Commissions are constituted which recommend to the Union Government regarding distribution of net proceeds of taxes between Centre and the States and allocation of shares of such proceeds between the respective states.  The Finance Commissions also recommend principles which should govern the grants-in-aid of the revenues of the states out of the Consolidated Fund of India. The 14 th Finance Commission (14 th FC) was mandated to review the state of finances, deficits and debt levels of Union Government and the States and suggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth.  The Commission was also to consider and recommend incentives and disincentives for States for observing the obligations laid down in the Fiscal Responsibility and Budget Management Acts. Accordingly, the 14 th FC while taking into account the developmental needs  and  the current  macro-  economic requirement, provided additional headroom of maximum 0.5 per cent over and above the normal limit  of  3  per  cent  Fiscal  Deficit  in  any  given  year  to  the  States  that  have  a  favourable  debtGSDP ratio of less than or equal to 25% and interest payments-revenue receipts ratio of less than  or  equal  to  10%.  The  14 th FC  considered  the  need  of  States  for  equitable  growth  and improvements in the quality of fiscal adjustment, with scope for headroom, where appropriate, for  States  to  take  recourse  to  fresh  borrowings  to  finance  developmental  expenditures.  For making the fiscal rules operational for the States, FFC has not proposed any conditionality in regard to adherence to the fiscal roadmap. The additional borrowings space over and above the FD/GSDP limit of 3% have been allowed to the following eligible States for 2016-17:

| S. No.   | State          | Eligibility for Additional Fiscal Deficit/GSDP over and above 3%   | Eligibility for Additional Fiscal Deficit/GSDP over and above 3%   |
|----------|----------------|--------------------------------------------------------------------|--------------------------------------------------------------------|
|          |                | %of GSDP                                                           | Amount (Rs. in Crore)                                              |
| 1        | Madhya Pradesh | 0.50                                                               | 2769                                                               |
| 2        | Meghalaya      | 0.25                                                               | 69                                                                 |
| 3        | Odisha         | 0.50                                                               | 1795                                                               |
| 4        | Sikkim         | 0.25                                                               | 44                                                                 |
| 5        | Telangana      | 0.50                                                               | 3122                                                               |
| 6        | Uttar Pradesh  | 0.25                                                               | 3119                                                               |
| Total    | Total          | Total                                                              | 10918                                                              |

Further, the 14 th FC has substantially enhanced the share of the States including Rajasthan in the Central divisible pool from the current 32 % to 42 %, which is the biggest ever increase in vertical tax devolution. Besides share of central taxes, the 14 th FC has recommended grants- in -aid to cover Revenue Deficit of States, local body grants (both to rural and urban local bodies) and  grants  for  augmenting  the  State's  Disaster  Response  Fund  (SDRF).  As  seen  over  the Finance Commission's award period, there is an increase of about Rs. 25 lakh crore (i.e.178%) in tax devolution and Rs.2.9 lakh crore (i.e.124%) in grant-in-aid recommended by the 14 th FC as  compared  to  the  actual  transfer  made  under  13th  Finance  Commission  award  period. Substantial increase in tax devolution and grants-in-aid recommended by 14 th FC is expected to add substantially to spending capacity of States and give fiscal autonomy to the States. This will result in improvement in States' financial status.

(c)  &  (d):  The  Central  Government  has  already  communicated  its  decision  to  simplify  the consent  mechanism  for  OMBs  under  Article  293  (3)  of  the  Constitution  to  all  the  States  on 16.08.2016.   The  simplified  mechanism  would  allow  the  States  to  prepare  their  borrowing calendar for the first nine months and seek one-time consent for raising OMBs during the first nine months of the Financial Year within the Net Borrowing Ceiling (NBC) fixed for each of the States. Prior to this arrangement, the States were required to obtain quarterly consent from the Central  Government  for  raising  OMBs  within  their  Net  Borrowing  Ceiling  (NBC).  Accordingly, one-time consent for raising OMBs till December 2016 has already been issued to those States including Rajasthan who have made a request for the same.  Thus, the simplified procedure will ensure that consent under Article 293(3) is issued only on three occasions during the year, one in the month of April for first nine months after fixation of borrowing ceilings, second in the month of December for the first two months of the fourth quarter and last in the month of March after the assessment of actual borrowings by the States.

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