States can now borrow Rs 21k cr more

The government today relaxed the borrowing limit of states to 4 per cent of gross state domestic product (GSDP) for the current fiscal, up from a previous ceiling limit of 3.5 per cent. The Cabinet approved changes in the Debt Consolidation and Relief Facility guidelines, which will enable states to borrow an additional Rs 21,000 crore in 2009-10.

The change has been made in the backdrop of limited fiscal space available to state governments given the reduction of Cenvat and service tax rates as part of government stimulus packages.

The finance ministry has been fixing the annual borrowing ceilings for states, largely in accordance with the fiscal deficit targets recommended by the Twelfth Finance Commission and accepted by the government.

Information and Broadcasting Minister Ambika Soni said after the Cabinet meeting that majority of the increased support to state governments would go towards public investment in infrastructure. “The government expects that the relaxation will spur development of infrastructure and employment generation through larger public investment and will accelerate growth revival in the medium term,” she said.

Analysts said the extra borrowing would increase bond supplies, adding to the upward pressure on yields.