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Debt raised by State PSUs to be considered borrowing by State

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Debt raised by State PSUs to be considered borrowing by State

Recently, the Union Finance Ministry has informed the states that market borrowings by state-owned undertakings, special purpose vehicles or agencies will be under the Fiscal Responsibility and Budget Management (FRBM) limit of the states.

These borrowings affect the revenue deficit and the fiscal deficit. Therefore, the approval of the Central Government has to be obtained under Article 293(3) of the Constitution for such borrowing.

Article 293(3) provides that if the State Governments are in debt to the Government of India, they need to seek the permission of the Center for taking fresh loans.

All the states have implemented their FRBM Acts as per the recommendation of 12th Finance Commission. The compliance of this Act is monitored by the concerned State Legislature.

At the beginning of each financial year, the central government fixes the net borrowing ceiling (NBC) of each state.

The net borrowing limit of the states has been fixed at 3.5% of the State Gross Domestic Product (GSDP) for the financial year 2022-23. In addition, an additional borrowing limit of 0.5% has also been given subject to reforms in the power sector.

FRBM Act, 2003:

  • It sets fiscal rules. It promotes fiscal discipline of the government.
  • The RBM Act was enacted in August 2003 and the rules for implementing the Act were notified in July
  • The objective of FRBM is to make the central government responsible for ensuring inter-generational equity in fiscal management and long-term macro-economic stability.
  • The Act sets an upper limit on the debt and fiscal deficit of the central government. It limited the fiscal deficit to 3% of GDP.

Fiscal Deficit: It refers to the difference between the total revenue received and the total expenditure of the government in a financial year.

Revenue Deficit: This occurs when the actual amount of revenue and/or the actual amount of expenditure does not commensurate with the budgeted revenue and expenditure.

Source- The Hindu

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