Prime Minister Narendra Modi said on Tuesday that the new public finance model, in which states were only allowed to exceed their annual borrowing limits in 2020-2021 if they undertook certain pre-defined reforms, is a classic example of the new model of “reforms by conviction and incentives.”
In a blog posted on LinkedIn, Modi said India has seen a model of “stealth and coercion reform”. This is a new model of “reform by conviction and incentive”.
“It was a boost, prompting states to adopt progressive policies to obtain additional funds. The results of this exercise are not only encouraging, but also go against the idea that there are few takers for sound economic policies, ”Modi wrote in the blog.
Citing the example of four reforms, which state governments had to undertake to become eligible for the additional 1% loan, Modi said that each of the reforms was related to improving the comfort of life for the public, mainly the poor, the vulnerable and the middle class. It also promoted fiscal sustainability.
“Raising sufficient resources for public welfare while ensuring sustainability is proving to be one of the greatest challenges,” said the Prime Minister.
He added that states were able to raise an additional 1.06 trillion rupees in 2020-2021 through a central “Bhagidari” state approach.
“Officials who have worked on these reforms suggest that without the incentive for additional funds, enacting these policies would have taken years,” Modi said.
Elaborating on the first report, which is the One Nation One Ration card, Modi said the main benefit of this is that migrant workers can get their food ration from anywhere in the country.
“Seventeen states have completed this reform and obtained additional loans amounting to Rs 37,600 crore,” the prime minister said.
Regarding the second reform related to additional borrowing, which aims to improve the ease of doing business, Modi said that this reform (covering 19 laws) is particularly useful for micro, small and medium enterprises (MSMEs). This is because these companies suffer the most from the burden of the “inspector raj”.
It also promotes a better investment climate, larger investments and faster growth.
Twenty states have completed this reform and have been authorized to borrow an additional Rs 39,521 crore.
The third reform required States to notify the floor rates of property tax and water and sanitation charges. This was in line with indicative stamp duty values for real estate transactions and current costs in urban areas.
“Eleven states have completed these reforms and obtained additional borrowing of 15,957 crore rupees in 2020-2021,” Modi said.
The fourth reform was the introduction of direct benefit transfer (DBT) instead of the free supply of electricity to farmers.
Additional borrowing of 0.15 percent of the government’s gross domestic product (GDP) was tied to it. A component has also been planned for the reduction of technical and commercial losses and another for the reduction of the gap between income and costs (0.05% of the GSDP for each).
Thirteen States have implemented at least one component while six States have implemented the LVD component. As a result, 13,201 crore rupees of additional borrowing was authorized.
Overall, 23 states have benefited from additional borrowing of Rs 1.06 trillion out of a potential of Rs 2.14 trillion.
“As a result, the total borrowing authority granted to states for 2020-2021 (conditional and unconditional) was 4.5% of the initially estimated GSDP,” Modi wrote.