Keeping in view the government’s policy for cooperative federalism, the finance ministry has simplified the process of granting additional borrowing limits to the states. It would process each proposal along with complete information independently as and when it is received in contrast to the earlier process of bunching all proposals into a single proposal.
As per recommendation of the 14th Finance Commission, the states have the access to additional borrowing limits subject to fulfilment of certain conditions. Fiscal deficit of all states is required be anchored to an annual limit of 3 percent of Gross State Domestic Product (GSDP). The states are eligible for flexibility of 0.25 percent over and above 3 percent for any given year for which the borrowing limits are to be fixed if their debt-GSDP ratio is less than or equal to 25 percent in the preceding year.
States are further eligible for an additional borrowing limit of 0.25 percent of GSDP in a given year for which the borrowing limits are to be fixed if the interest payments are less than or equal to 10 percent of the revenue receipts in the preceding year. The flexibility in availing the additional limit under either of the two options or both is be available to a state only if there is no revenue deficit in the year in which borrowing limits are to be fixed and the immediately preceding year.