Prime Minister Narendra Modi on Tuesday said India adopted a new model of “reforms by conviction and incentives” to successfully implement several long-term welfare measures while encouraging states to raise ₹1.06 lakh crore additional money in 2020-21 when the world was facing severe resource crunch due to the Covid-19 pandemic.
This significant increase in availability of resources was made possible by an approach of Centre-state ‘bhagidari’ (partnership), Modi said in a post titled ‘Reforms by Conviction and Incentives’ posted on Linkedin.
“In this backdrop of financial crunch seen across the world, do you know that Indian states were able to borrow significantly more in 2020-21? It would perhaps pleasantly surprise you that states were able to raise an extra ₹1.06 lakh crores,” he wrote
Referring to the government’s economic stimulus plan announced in May last year to protect lives and expeditiously revive the pandemic-ravaged economy, he said: “When we formulated our economic response to the Covid-19 pandemic, we wanted to ensure that our solutions do not follow a ‘one-size-fits-all’ model.”
In order to protect lives, India imposed a 68-day national lockdown from March 25, 2020, which saw the economy plunging into technical recession (negative growth for two subsequent quarters). This led to a 24.4% contraction of the economy in the first quarter, and 7.3% contraction in the second quarter of 2020-21. The ₹20.97 lakh crore stimulus package , Aatmanirbhar Bharat Abhiyan (Self-reliant India Initiative) , was announced by the government in May. The economy expanded by 0.5% in the third quarter and 1.6% in the fourth quarter ended March 31.
Modi said the stimulus package announced in May 2020 enhanced borrowing limit of states by an additional 2% of gross state domestic product (GSDP), of which 1% was made conditional on the implementation of four broad economic reforms. Under the Fiscal Responsibility and Budget Management (FRBM) Act, states are required to keep their fiscal deficit at 3% of GSDP.
“This nudge for reform is rare in Indian public finance. This was a nudge, incentivising the states to adopt progressive policies to avail additional funds. The results of this exercise are not only encouraging but also run contrary to the notion that there are limited takers for sound economic policies,” PM Modi wrote in the blog.
As part of the stimulus, on May 17, 2020 the Centre allowed states to borrow additional 2% of the GSDP, amounting to ₹4,27,300 crore.
Explaining the purpose behind the conditional extra borrowing, PM said: “The four reforms to which additional borrowings were linked (with 0.25% of GDP tied to each one) had two characteristics. Firstly, each of the reforms was linked to improving the Ease of Living of the public and particularly the poor, the vulnerable, and the middle class. Secondly, they also promoted fiscal sustainability.”
The first reform , ‘One Nation One Ration Card’ policy was to ensure that “migrant workers can draw their food ration from anywhere in the country,” he added, pointing out that 17 states completed this reform to access additional borrowings of ₹37,600 crore.
Talking about the second reform related to improving ease of doing business, PM Modi said: “This reform (covering 19 laws) is of particular help to micro and small enterprises, who suffer the most from the burden of the ‘inspector raj’. It also promotes an improved investment climate, greater investment and faster growth.” This was availed by 20 states with additional borrowing of ₹39,521 crore.
The third one was based on recommendations of the 15th Finance Commission and other experts who propounded sound property taxation. ; 11 states completed these reforms to borrow ₹15,957 crore , he said.
The fourth condition was to introduce direct benefit transfer (DBT) of power subsidy to farmers. “This improves the finances of distribution companies, promotes conservation of water and energy and improves service quality through better financial and technical performance,” the PM said. At least one of the three components were implemented by 13 states, while 6 states implemented the DBT component to get additional borrowing space of ₹13,201 crore, he said.
“Overall, 23 states availed of additional borrowings of ₹1.06 lakh crores out of a potential of ₹2.14 lakh crores. As a result, the aggregate borrowing permission granted to states for 2020-21 (conditional and unconditional) was 4.5% of the initially estimated GSDP,” he said.
Modi said this was a “unique experience” for a large nation like India. “We have often seen that for various reasons, schemes and reforms remain un-operational often for years. This was a pleasant departure from the past where the Centre & States came together to roll out public friendly reforms in a short span of time amidst the pandemic,” he said.