Relaxation of Fiscal Deficit Target and Borrowing Ceiling for States for the Year 2009-10

26-2-2009

Contents

In January 2009, Ministry of Finance (MoF), as a part of the second economic stimulus package, relaxed the Debt Consolidation and Relief Facility (DCRF) guidelines by modifying the fiscal deficit target as 3.5% so as to enable the States to borrow up to 3.5% of their respective GSDP during 2008-09 as one-time relaxation for undertaking capital expenditures. Thus the States were enabled to raise additional market borrowings of 0.5% of their Gross State Domestic Product (GSDP), amounting to about Rs 30,000 crore, for capital expenditures. In addition, the DCRF requirement of elimination of revenue deficit was also relaxed for 2008-09. These States will not lose benefits of DCRF, provided they achieve the 3% Fiscal Deficit target in 2009-10 and maintain revenue balance in 2009-10. Such States will have to suitably amend their respective FRBM Acts. As regards the States which opt to borrow in excess of 3.5% of their GSDP, MoF will consider additional market borrowings during 2008-09 upto 0.5% of their GSDP for undertaking capital expenditures. These States will suffer forfeiture of the benefits of DCRF. MoF would write to the 13th Finance Commission to make appropriate adjustments in respect of debt relief granted under DCRF.

Even though the signals emerging from the economic stimulus measures taken by the Government are encouraging, the full impact of the economic slow down in other parts of the world, specially Europe and Asia, is yet to unfold. Due to the strong export linkages with these economies, it is likely that the Indian economy may feel further impact in the coming months. In the interim Budget Speech (2009-10), the Finance Minister had stated that the government may have to review the ceiling of fiscal deficit that the States can incur in 2009-10 in terms of the DCRF. After further consideration, in has been concluded that there is a need to extend the relaxation in the fiscal deficit target of the States to 2009-10 in order to spur the development of infrastructure and employment generation. The Finance Minister has, therefore, announced in the Lok Sabha on 24.02.2009 that the arrangement of 3.5% of fiscal deficit target for the States is being extended to 2009-10.

To give effect to this decision, today the Cabinet decided as under:-

(i) to relax the DCRF guidelines for the year 2009-10 by modifying the fiscal deficit target as 3.5% so as to enable the States to borrow upto 3.5% of their respective GSDP during 2009-10 as one-time relaxation for undertaking capital expenditure. In addition, the DCRF requirement of elimination of revenue deficit may also be relaxed for 2009-10. The States will not lose benefits of DCRF, provided they achieve the 3.5% Fiscal Deficit target in 2009-10. The States will have to suitably amend their respective FRBM Act.

(ii) Ministry of Finance would write to the 13th Finance Commission to make appropriate adjustments.

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