Background

• In May 2020, under the Aatmanirbhar Bharat package, the Central government allowed state governments to hike their borrowing limits from 3% to 5% of Gross State Domestic Product (GSDP). However, the Centre attached conditions for the increased borrowing space, permitting only 0.5 per cent of GSDP as an unconditional increase. 
• Rest, 1 per cent will be in four tranches of 0.25 per cent, with each tranche linked to expenditure on ‘One Nation One Ration’, urban local body revenues, power distribution, and ease of doing business reforms. 
• The last 0.5 per cent to be permitted if at least three of four milestones are reached.
• Twenty three States availed of additional borrowings of ₹1.06 lakh crore out of a potential ₹2.14 lakh crore.

Why in News?

• Prime Minister Narendra Modi recently said that India has moved from a model of ‘reforms by stealth and compulsion’ to a new model of ‘reforms by conviction and incentives’, referring to States being granted additional borrowing limits last year under a reform-linked window.
• Seventeen States that facilitated ration-card portability and installed electronic point-of-sale devices at fair price shops were granted additional borrowings amounting to ₹37,600 crore. Similarly, 20 States completed reforms to ease the red tape faced by businesses to avail borrowings of ₹39,521 crore.
• The third reform required States to notify floor rates of property tax and of water & sewerage charges, in consonance with stamp duty guideline values for property transactions and current costs respectively, in urban areas. 11 states completed these reforms and were granted additional borrowing of ₹15,957 crore.
• The least traction was seen for the Union government’s reform idea of replacing free electricity for farmers with a Direct Benefit Transfer. States were asked to frame a scheme with actual implementation in one district on a pilot basis by the end of 2021, for an additional borrowing limit of 0.15% of GSDP. Loans worth another 0.10% of GSDP were linked to reducing the gap between revenues and costs and reducing technical and commercial losses in the power sector.
• 13 States implemented at least one component, while 6 States implemented the DBT component. As a result, ₹13,201 crore of additional borrowings was permitted.

Reference:

1. https://www.thehindu.com/business/Economy/tying-reforms-incentives-helped-widen-adoption/article34918648.ece