Reform Linked Borrowing

Why in news ?

Indian states were able to borrow an extra Rs. 1.06 lakh crore in 2020-21 (FY21) due to the Reform Linked Borrowing window.

• This was announced to provide an additional leeway to states in order to cope with the adverse effects of Covid-19 pandemic on the economy.

About:

• This was a nudge, incentivising the States to adopt progressive policies to avail additional funds.
• In October 2020, the Central government had linked permission for additional borrowing of 1% of their GSDP (Gross State Domestic Product) to implementation of four critical reforms, which are:
  • Implementation of One Nation One Ration Card System,
  • Ease of doing business reform,
  • Urban Local body/ utility reforms and
  • Power Sector reforms.

Under this reforms-linked borrowing window, states were to get access to funds of up to Rs 2.14 lakh crore on completion of all the four reforms.

• For states completing three of the four reforms, the Centre would provide additional funds assistance of Rs. 2,000 crore for capital expenditure.
• For FY 2021-22, the net borrowing ceiling for states has been fixed at 4% of the projected GSDP (about Rs 8.46 lakh crore), based on recommendations of the Fifteenth Finance Commission.