Modi is facing a backlash from within his party for insisting Chief Minister Nitish Kumar should stay. | Photo: PTI
Deputy CM of Bihar, Sushil Modi | Photo: PTI
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New Delhi: States need to borrow more to step up capital expenditure to counter the economic slowdown at a time when revenues are slowing down, Bihar Deputy Chief Minister Sushil Kumar Modi has said.

In an interview to ThePrint, Modi said, “During an economic slowdown, we require to spend more to boost consumption.”

He added, “However, states will get less money from the Centre and their own sources of revenue are also growing at a lower rate. So states will need to borrow more to ensure capital expenditure is not affected.”

The deputy CM said a relaxation in the target set in the Fiscal Responsibility and Budget Management Act as well as faster permission for borrowing from the market have been sought from the Narendra Modi government.

“A relaxation in the fiscal deficit target as set by the FRBM Act has been sought. Many states have asked the limits to be relaxed to 3.5 per cent of gross state domestic product (GSDP) from 3 per cent of GSDP,” he said.

Bihar is likely to get Rs 10,000 crore less this year as devolution from central taxes, said Sushil Modi, who also holds the finance portfolio.

The FRBM Act mandates states to keep their fiscal deficit targets under the prescribed limits. However, a slowdown in direct tax and indirect tax collections by the Centre means the amount of money states get from the pool of total central taxes as devolution is likely to come down.

In addition, the pace of growth of state GST revenues has also been lower than anticipated. This has forced states to cut down on capital expenditure at a time when the economy is expected to fall to an 11-year low of 5 per cent.

The Modi government is also expected to reset the FRBM targets as achieving a 3 per cent fiscal deficit by 2021-22 looks near impossible at a time growth is falling sharply.

In a report last month, India Ratings and Research pointed out that a decline in tax revenues, a lower nominal GDP and higher expenditure will see aggregate fiscal deficit of states touch 3 per cent of GDP in 2019-20 as against the budgeted 2.6 per cent.

Besides the lower devolution and GST revenues, the report said states will also see lower tax collections from value added tax on petroleum products.

“Growth of consumption of petroleum products at 2.2% in FY20 so far (April-November) is the lowest in the last seven years,” the report said. In 2013-14, the growth was 0.6 per cent.


Also read: 3 reasons why Modi govt is sure its second bid to sell Air India won’t fail


‘States should be allowed to swap debt liability’

Speaking to ThePrint, Sushil Modi said there is a need to allow states to repay their high-interest older loans taken from the National Small Savings Fund (NSSF) ahead of schedule to lower the interest burden.

“The rate of interest on NSSF loans is very high and this places a heavy interest burden. States should be allowed to swap our debt liability and repay the higher interest loans.” he said.

Bihar is also demanding faster approvals from the central government to make open market borrowings.

Modi pointed out that while states get permission from the Centre to borrow up to 75 per cent of their debt limit without any issue, it has become difficult to get permission for the remaining 25 per cent.

The Bihar leader also favoured the central government transferring funds to the state consolidated fund for any centrally sponsored schemes rather than sending it directly to the implementing authorities.

“In many of the centrally sponsored schemes, the Government of India is (right) now directly sending the money to the implementing agencies rather than to the consolidated state fund,” he said.


Also read: India needs foreign capital to fund record borrowing, IDFC says


 

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