In effect, this will allow the state to raise an additional Rs 36,000 crore in loans without violating fiscal discipline under the KFRA.
BENGALURU: With the Covid-19-induced lockdown severely affecting revenues, the Karnataka Cabinet on Tuesday approved an amendment to the Karnataka Fiscal Responsibility Act (KFRA) to increase the state’s borrowing limit to 5 per cent of GSDP instead of the existing 3 per cent. In effect, this will allow the state to raise an additional Rs 36,000 crore in loans without violating fiscal discipline under the KFRA.
The State Cabinet has also approved plans to borrow Rs 33,000 crore out of the enhanced borrowing limit which will be spent not just as capital investment, but also as expenditure on development activities that have been stalled due to shortage of funds. The amendment Bill will be introduced in the upcoming Assembly session.
The Centre, in May, increased reform-linked borrowing limit for states from 3 per cent to 5 per cent for the 2020-2021 fiscal, anticipating a loss of revenue. “An amendment will be made to Section 4 of the Fiscal Responsibility Act to allow additional borrowing up to 5 per cent of GSDP.
We will borrow Rs 33,000 crore as a one-time measure. Currently, our borrowing is at about Rs 40,000-47,000 crore and an additional Rs 33,000 crore will be fresh loans. We generally borrow only for capital expenditure but this additional loan will be used for development activities too,” Parliamentary Affairs Minister J C Madhuswamy told reporters. He acknowledged that various development activities had been stalled due to dearth of funds, but added that the government had not run out of funds.
Section 4 of the KFRA deals with Fiscal Management Principles to ensure state debts, guarantees and liabilities are maintained at prudent levels. Three fiscal parameters of the KFRA mandate adequate revenue surplus, total liabilities to be under 25 per cent of GSDP and fiscal deficit to be under 3 per cent of the GSDP. The estimated fiscal deficit for Karnataka for 2020-2021, as per the budget speech, was 2.55 per cent of the GSDP. With the borrowing limit raised to 5 per cent, the state will be able to borrow more without violating fiscal norms.In his 2020-2021 budget speech, Chief Minister B S Yediyurappa had estimated total borrowings at Rs 52,918 crore. But, in the lockdown scenario, the state has opted for additional borrowing.
Sources in the Finance Department told TNIE that despite the additional borrowing, the state may see a considerable loss of receipts. Revenue loss for this fiscal is expected to be more than the additional borrowing. Minister Madhuswamy said that state will borrow from existing sources. Karnataka usually borrows from the Centre , open market, LIC, NSSF, NCDC, RIDF, etc. With the GST Council too asking states to opt for borrowing to offset losses arising out of GST compensation shortfall, Karnataka has told the council that it would prefer to borrow Rs 11,324 crore through a special window facilitated by the GST Council from the RBI at a reasonable rate of interest (yet to be fixed). Under this option, the principle and interest repayment will come out of compensation cess after 2022 when the first five years of the GST regime ends. A final decision on this is pending since other states have opposed the GST Council’s suggestion.
