Link Aadhaar to ration cards, hike property tax — how states can increase borrowing limit

Expenditure Secretary T.V. Somanathan said the Centre's conditions to increase the borrowing limit for states are long-pending reforms aimed at ensuring debt sustainability.

Expenditure secretary T. V. Somanathan | ThePrint

New Delhi: Providing free electricity to farmers only through the direct benefit transfer (DBT) route, linking of Aadhaar with every ration card, increasing property tax rates and levying user charges for water and sanitation services are some of the reform measures that states will have to undertake before they can avail of the increased borrowing limits allowed by the Centre.

In an interview to ThePrint, Expenditure Secretary T.V. Somanathan, said that these conditions have been put in place to ensure that states bring in reforms that have been pending for a long time.

“We have been as realistic as possible. None of these are impossible, undesirable, and none of these will harm the states or the public. Most have been pending for a long time,” he said.

Somanathan added that the states will have to bring in these reforms at the earliest if they want to utilise the enhanced borrowing limits in the current financial year.

Last week, the central government had allowed states to borrow upto 5 per cent of the gross state domestic product (GSDP) as against the earlier limit of three per cent.

Enhanced borrowing limits

While states were allowed to borrow upto 3.5 per cent of GSDP unconditionally, the Centre placed conditions on borrowings over and above this limit.

These conditions included steps to ensure the universalisation of ration cards (to allow their use around the country), improve ease of doing business, bring in reforms to make state-owned power distribution firms more profitable, and shore up urban local body revenues.

If states meet these prescribed conditions, they can borrow an additional 0.25 per cent each for every measure. The remaining 0.5 per cent borrowing will be subject to them fully meeting three of the four conditions.

States such as Kerala, Tamil Nadu, West Bengal and Telangana had expressed their opposition to such a move pointing out that the central government was wrong in placing conditions for borrowing by the states.

What Centre’s conditions include

Universalisation of ration cards 

For the One Nation One Ration card scheme, the Centre has asked states to ensure Aadhaar seeding to every ration card.

It has also asked states to install an electronic point-of-sale (POS) machine at every ration shop for enabling the use of electronic ration cards. Currently, ration shops in 12 states where the scheme is being tested on a pilot basis have installed electronic POS machine.

The government had initially planned to achieve universalisation of One Nation One Card scheme by June 2020. However, Finance Minister Nirmala Sitharaman, in a press briefing, said, that the deadline has been shifted to March 2021.

Power distribution

As part of the power distribution reforms, states will have to introduce DBT for farmers who currently receive free electricity. The Centre wants farmers to pay for just the electricity they consume, which will later be reimbursed by the state through a direct cash transfer into farmers’ bank accounts. This way, the government hopes, farmers will be more conscientious of their usage.

However, implementing the move will be easier said than done as states like Tamil Nadu have flagged this requirement as a politically sensitive issue. Tamil Nadu is set to have its next assembly election next year.

The states will also have to ensure that power distribution firms bring in reforms to reduce their aggregate technical and commercial losses and do away with the gap between the cost of supply of power and revenue realised. These were also part of the Uday scheme — the power sector reforms initiated in the first term of the Narendra Modi government which didn’t manage to achieve any substantial results.

Property taxes

As part of reforms for the urban local body to increase their revenues, states have been asked to ensure a review of the floor rates of property taxes.

“The property tax should be in consonance with urban property prices. There are cities in India where property tax rates have not been revised upwards in decades despite prices having skyrocketed,” he said.

Property tax is one of the main revenue earners for Indian municipalities. But collections across cities have remained quite low because of inefficiency of in municipality systems.

Water charge

Each municipality will also have to review the floor rates for user charges for water and sewage and revenue collection targets will have to be set by the state for each municipality.

Currently, a handful of states, including Maharashtra and Uttar Pradesh, have fixed user charges for water but these are too nominal and inadequate in terms of the expenditure incurred in providing the service.

The idea, Somanathan said, is that states have to tap their own revenue earning potential.

“If you are borrowing, it has to be repaid and your debt sustainability has to go up. For debt sustainability, you need to collect your own revenues,” Somanathan said, adding that these are part of the finance commission’s recommendations.

Ease of doing business initiatives

As part of the ease of doing business initiatives, the states will have to complete district level assessment of the ease of doing initiatives. They will also have to review some state laws.

For instance, the Shops and Establishment Act will have to be amended to make renewal of licenses automatic and non-discretionary through an online payment process that the government wants operational by 31 December, 2020. Also, inspection reports of such units will have to be uploaded and shared with the assessed unit to make it a transparent process.