Odisha to amend FRBM Act for additional borrowing

The Odisha government plans to amend the Odisha Fiscal Responsibility and Budget Management Act, 2005 that would enable it to avail an additional 2% fiscal deficit of Gross State Domestic Product from the current level of 3.5% now.

Finance department officials said the additional 2% fiscal deficit includes unconditional borrowing of 1% of GSDP and the balance 1% depending upon the implementation of four sectoral reforms, each carrying weightage of 0.25%. The decision would give an additional leeway to the state government to go for higher borrowing for meeting its rising capital.

In 2016, the state had last amended the FRBM Act raising the level of fiscal deficit to 3.5% of the Gross State Domestic Product (GSDP) from 3%, giving it an additional leeway to go for higher borrowing for meeting its rising Capex (capital expenditure).

Odisha finance secretary AKK Meena said the state may resort to borrowing in the 2021-22 financial year. "We can borrow up to 5% fiscal deficit of the Gross State Domestic Product," he said. This additional borrowing would enable the state government to meet higher resources requirement for Covid-19 management, maintain the standards of service delivery to the public, compensate the shortfall arising out of GST implementation (GST compensation Shortfall), and maintain the level of Capital Expenditure on infrastructure projects in the State.

The amendment of the FRBM Act comes at a time when the revenue growth has not been spectacular and the central devolution to the state has come down. Though the 15th Finance Commission kept devolution to states unchanged in its interim report for 2020-21, the cumulative share contracted marginally to 41% from 42% after the number of states was reduced to 28 because of the reorganisation of Jammu & Kashmir into two Union Territories.

While Odisha has so far seen a shortfall of over ₹10,840 crore in the net tax and duty proceeds in 2020-21, the devolution of central taxes and duties to Odisha in the coming financial year 2021-22 will be ₹3,048.99 crore lesser than the tax devolved to the state in 2019-20.

Economists said states like Odisha which despite being financially prudent over last few years would face an unprecedented situation in the post-Covid state. "We are now in a situation in which there is a high deficit, high borrowing, high expenditure, less revenue, and less growth. All states have to increase fiscal deficit level otherwise they can't fulfill their promises. The state governments in many poll-bound schemes would not be able to announce new schemes out of their own resources for the next 2-3 years," said Pratap Jena, associate professor of National Institute of Public Finance and Policy.