New formula needed to define loan caps for states, say SBI economists

MUMBAI: States are increasingly borrowing higher by making ambitious GSDP projections and hence, there is a need for a new formula to define the loan caps, economists at the largest lender SBI said on Tuesday.

Its chief economist Soumya Kanti Ghosh said the Finance Commission had recommended that borrowings by states should be linked to the size of the GSDP, but the states have developed a tendency where they project higher GSDP projections in budgets to borrow more during a year. Eventually, they revise down the projection but the borrowings have already happened.

West Bengal, Maharashtra, Andhra Pradesh, Chhattisgarh, Uttar Pradesh, Tamil Nadu and Rajasthan have borrowed higher than 3% of their actual GSDP in FY21 or fiscal years before it, the report said, adding that the trend is getting broadbased.

“We believe there is a need to devise a better formula for setting state borrowings and delinking it from advance GSDP estimates,” it demanded.

States that are better behaved may be rewarded in terms of an increase in size of the permissible borrowing in the subsequent year where permissible borrowing is scaled up by the lower advance borrowings, it said.

A similar scheme could be envisaged for states that are borrowing more, with a scale down in the permissible borrowing or the higher advance borrowings may be resorted to only at a rate that is higher than market rate of interest, it said.

Another possible solution could be linking of the state borrowing to its own tax revenue, the report said.