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Why Should The States Borrow When They Have Legitimate Dues Held Up By The Centre?

By Sunil Garodia
First publised on 2020-05-17 13:53:49

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.

It is good that the Finance Minister has increased the limit of borrowings by states from 3% to 5% of their GDP. It is also good that the finance ministry has asked the RBI to increase the advance limits of the states by 60% and let them remain overdrawn for 21 days (14 days now) and up to 51 days (32 days now) in a quarter. This will definitely ease the pressure on the states that are battling the coronavirus.

But the Finance Minister did not utter a word about clearing the huge pending dues of the states on account of GST and other collections as also the relief to be provided to them to fight Covid-19. Why should the states borrow extra money and pay interest on it when they have funds of their own that are not being released by the Centre?

Instead of undertaking austerity measures and saving every penny to fight the pandemic, the states are being forced to add additional interest outgo on account of such borrowings. This makes little economic sense. After all, the Centre had collected the money on behalf of the states. It should have transferred the amount long back. But it was not done as the Centre was short of funds.

But the legitimate and already collected dues of the states cannot be kept in abeyance any longer. The Centre has to arrange for the money. If need be it should borrow and pay the states. The interest burden should be on the Centre and not the states. If they are burdened with interest outgo, they will be pegged back and the fight against coronavirus will suffer.

The Centre must realize that the state administrations are at the forefront of the fight. If at all it is not able to arrange funds to pay the states, it should make this additional 2% (of the state GDP) borrowing interest-free for states and absorb the interest cost. That is the least it can do as it has defaulted in making the due payments of the states or providing any substantial relief to fight Covid-19.

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