States can borrow directly from foreign agencies for infra projects

The Union Cabinet has approved new rules to allow financially sound state government entities to borrow directly from other countries which give Official Development Assistance for major infrastructure projects.

In such cases, the state government concerned will give a guarantee and the Centre will provide a counter-guarantee.

For instance, the Mumbai Metropolitan Region Development Authority, a Maharashtra government entity, would be allowed to directly take an ODA loan from the Japan International Cooperation Agency (JICA) for the ~17,854 crore Mumbai Trans-Harbour Link project. The JICA loan portion is expected to be ~15,109 crore.

The existing guidelines did not allow direct borrowing by state government entities from external agencies.

Finance Minister Arun Jaitley said several state agencies were implementing infrastructure projects of national importance. These projects, even if viable and sound, have huge funding requirements.

And, borrowing by state governments for such projects might exhaust their respective borrowing limits.

A state government is allowed to borrow to the extent that its fiscal deficit does not exceed the limit of three per cent of its gross state domestic product (GSDP). The 14th Finance Commission provided a further flexibility of 0.5 percentage points to states, subject to stiff conditions. Under the change in rule, this additional borrowing by state entities for such infra projects will not count for the three per cent ceiling applicable on states. It allows financially sound state entities to directly borrow and repay the loan required for such major infra projects, without burdening the state exchequer, the finance minister said.

The new arrangement will be subject to fulfilment of certain conditions. For instance, all repayment of loan and interest to the funding agencies will be directly remitted by the borrower concerned.

External assistance plays a key supportive role in financing of many infra projects, social sector projects and in building of institutional capacity. This role has gained further significance in view of the large gap in funding requirements for major infra projects of states.

At present, external development assistance from bilateral and multilateral sources is received by the Centre for projects or programmes in the central sector, for projects implemented by central public sector undertakings, and on behalf of state governments for state sector projects or programmes.

The country has an estimated funding requirement of ~43 lakh crore ($646 billion) for infra projects over the next five years. About 70 per cent of this would be needed in power, roads and urban infrastructure.

The recent N K Singh panel report on a new Fiscal Responsibility and Budget Management law has recommended bringing down the combined state fiscal deficits to 2.5 per cent of their GDP in the medium term, from the current 2.98 per cent.