Modi rejects demand to delink reforms from state borrowing

The PM’s meeting with chief ministers on Tuesday provided a clear indication of the Centre’s intention to stay the course of reforms although its agenda was largely devoted to the pandemic.

Prime Minister Narendra Modi wants to remain focused on economic reforms and use the Covid-19 pandemic to push some long-pending measures.

The Prime Minister rejected the argument. Two people who attended the meeting quoted Modi as telling Singh not to make it a prestige issue. (AP)

The PM’s meeting with chief ministers on Tuesday provided a clear indication of the Centre’s intention to stay the course of reforms although its agenda was largely devoted to the pandemic.

Punjab CM captain Amarinder Singh demanded at the meeting that the Centre delink a requirement for reforms from an enhancement of the states’ market borrowing limits. His argument, according to a person who attended the meeting, was that while the Centre had permitted states to borrow more money from the market, the increase has been linked to stringent reform conditions. Singh argued that reforms and borrowing should not be tied.

The Prime Minister rejected the argument. Two people who attended the meeting quoted Modi as telling Singh not to make it a prestige issue. “Use this opportunity to bring in reforms this will help your state and your people. You should also create a conducive environment for economic growth while enhancing health infrastructure,” the PM said.

As a part of the financial package announced by the Centre in the aftermath of the Covid-19 pandemic, it had accepted the demand from many states and hiked the net borrowing limit to 5% of gross state domestic product (GSDP) from 3%. Out of the 2 percentage points increase in the borrowing limit, 1.5 percentage points would be linked to “specified and measurable” reform actions.

The PM added that the Centre trusted the states to do the right thing and that’s why was pushing the states to implement reforms. Elaborating on the need for reforms, Modi said that going forward, the country would need a continuous upgrade of the health infrastructure and accelerated economic growth, the people cited above said.

He also maintained that Covid-19 “cases in absolute terms may increase but don’t lose sight of economic revival and upgradation of our healthcare.”

The laundry list of reform measures include four broad categories: pushing the one nation-one ration card programme to provide universal access to the public distribution system, further ease of doing business, making power distribution more viable and enhancing the revenues of municipal bodies.

Announcing the reforms, finance minister Nirmala Sitharaman said on May 17 that the extra borrowing will be linked to specific reforms, including some recommendations by the 15th Finance Commission. The Centre also expected the states to ensure sustainability of additional debt through higher GSDP growth and lower fiscal deficits.

This measure, according to the Centre, would allow states to mop up from an additional, combined fund of Rs 4.28 lakh crore to meet their fiscal needs.

Achiransu Acharya, an economist with Viswa Bharati University, said, “In this time of fiscal crunch, the state and its different arms should be able to able to improve its fiscal heath and for that reason they must usher in reforms. For example, if the states undertake power sector reforms, the power tariff might increase for consumers. Remember, when multilateral agencies such as IMF or World Bank gives loans, they too, want guarantee on reforms.”