In this context of financial crisis that we see all over the world, did you know that the Indian States were able to borrow significantly more in 2020-2021?
The Covid-19 pandemic has come with a whole new set of policy-making challenges for governments around the world. India is no exception. Mobilizing sufficient resources for public welfare while ensuring sustainability is proving to be one of the greatest challenges.
In this context of financial crisis that we see all over the world, did you know that Indian states were able to borrow significantly more in 2020-2021? It might pleasantly surprise you if states were able to raise an additional Rs 1.06 lakh crore in 2020-2021. This significant increase in the availability of resources was made possible by a Bhagidari Center-State approach.
When we formulated our economic response to the Covid-19 pandemic, we wanted to ensure that our solutions do not follow a ‘one size fits all’ model. For a federal country with a continental dimension, finding political instruments at the national level to promote reforms by state governments is indeed difficult. But, we had faith in the robustness of our federal regime and we moved forward in the spirit of the Bhagidari center-state.
In May 2020, as part of the Aatmanirbhar Bharat program, the Indian government announced that state governments would be allowed to borrow more for 2020-2021. An additional two percent of the GSDP was authorized, one percent of which was conditional on the implementation of certain economic reforms. This reform boost is rare in Indian public finances. It was a boost, prompting states to adopt progressive policies to secure additional funds. The results of this exercise are not only encouraging but also go against the idea that there are few takers for sound economic policies.
The four reforms to which additional borrowing was linked (with 0.25 percent of GDP tied to each) had two characteristics. First, each of the reforms was linked to improving the living comfort of the population and in particular the poor, the vulnerable and the middle class. Second, they have also promoted fiscal sustainability.
The first reform under the One Nation, One Ration Card policy required state governments to ensure that all state ration cards under the National Food Security Act ( NFSA) have the Aadhaar number of all family members and that all fair-price stores have electronic point-of-sale devices. The main advantage is that migrant workers can get their food ration from anywhere in the country. In addition to these benefits for citizens, there is the financial benefit of eliminating fake cards and duplicate members. Seventeen states completed this reform and obtained additional loans amounting to Rs 37,600 crore.
The second reform, aimed at improving the ease of doing business, required states to ensure that business license renewals under seven statutes be made automatic, online, and non-discretionary upon payment of a fee. Another requirement was the implementation of a computerized random inspection system and inspection notice to reduce harassment and corruption under 12 other laws.
This reform (covering 19 laws) particularly benefits micro and small enterprises, which suffer the most from the burden of the “inspector raj”. It also promotes an improved investment climate, larger investments and faster growth. Twenty states have completed this reform and have been authorized to borrow an additional Rs39,521 crore.
The 15th Finance Committee and several academics have stressed the crucial importance of sound property taxation. The third reform required states to notify the floor rates of property tax and water and sanitation charges, in accordance with indicative values of stamp duties for real estate transactions and running costs, respectively, in urban areas. . This would improve the quality of services to the urban poor and middle class, support better infrastructure and stimulate growth. Property tax is also progressive in its incidence and therefore the urban poor would benefit the most. This reform also benefits municipal staff who are often confronted with late payment of salaries. Eleven states have completed these reforms and obtained an additional loan of 15,957 crore rupees.
The fourth reform was the introduction of direct benefit transfer (DBT) instead of the free supply of electricity to farmers. The requirement was to formulate a statewide program with actual implementation in a district on a pilot basis by the end of the year. Additional loans of 0.15 percent of MSRP were tied to it. A component has also been planned for the reduction of technical and commercial losses and another for the reduction of the gap between income and costs (0.05% of the GSDP for each). This improves the finances of distribution companies, promotes water and energy conservation and improves the quality of service through better financial and technical performance. Thirteen States have implemented at least one component, while six States have implemented the LVD component. As a result, 13,201 crore rupees of additional borrowing was authorized.
Overall, 23 states have resorted to additional borrowing of Rs 1.06 lakh crore out of a potential Rs 2.14 lakh crore. As a result, the full borrowing authority granted to states for 2020- 2021 (conditional and unconditional) was 4.5% of the initially estimated GSDP.
For a great nation with complex challenges like ours, it was a unique experience. We have often seen that for a variety of reasons, programs and reforms often go unheeded for years. It was a nice start from the past when the center and states came together to roll out pro-public reforms in a short period of time amid the pandemic. This was made possible through our approach of Sabka Saath, Sabka Vikas and Sabka Vishwas. Officials who worked on these reforms suggest that without this incentive for additional funds, enacting these policies would have taken years. India has seen a model of “stealth and coercion reform”.
This is a new model of “reform by conviction and incentive”. I am grateful to all the States who have taken the initiative to introduce these policies in the midst of difficult times for the well-being of their citizens. We will continue to work together for the rapid progress of 130 crore Indians.
The writer is the Prime Minister of India