Reform Linked Borrowing | 24 Jun 2021

Why in News

Indian states were able to borrow an extra Rs. 1.06 lakh crore in 2020-21 (FY21) due to the Reform Linked Borrowing window.

  • This was announced to provide an additional leeway to states in order to cope with the adverse effects of Covid-19 pandemic on the economy.


  • Chapter II of Part XII of the Constitution of India deals with borrowing by the Central Government and State Governments.
  • It comprises two provisions - Article 292 which covers borrowing by the Central Government and Article 293, which covers borrowing by State Governments.
  • Article 293 (3) requires State Governments that are indebted to the Central Government to seek the consent of the Central Government before raising further borrowings.

Key Points

  • About:
    • This was a nudge, incentivising the States to adopt progressive policies to avail additional funds.
    • In October 2020, the Central government had linked permission for additional borrowing of 1% of their GSDP (Gross State Domestic Product) to implementation of four critical reforms, which are:
      • Implementation of One Nation One Ration Card System,
      • Ease of doing business reform,
      • Urban Local body/ utility reforms and
      • Power Sector reforms.
    • Under this reforms-linked borrowing window, states were to get access to funds of up to Rs 2.14 lakh crore on completion of all the four reforms.
    • For states completing three of the four reforms, the Centre would provide additional funds assistance of Rs. 2,000 crore for capital expenditure.
    • For FY 2021-22, the net borrowing ceiling for states has been fixed at 4% of the projected GSDP (about Rs 8.46 lakh crore), based on recommendations of the Fifteenth Finance Commission.
  • One Nation One Ration Card System (ONORC) Reforms:
    • This was aimed to ensure that the beneficiaries under the National Food Security Act (NFSA) and other welfare schemes, especially the migrant workers and their families, get ration from any Fair Price Shop (FPS) across the country.
    • Other aims of the intended reform were to better target beneficiaries, elimination of bogus/ duplicate/ ineligible ration cards and thus enhance welfare and reduce leakage.
    • For this, the reform conditions stipulated Aadhar Seeding of all Ration Cards, biometric authentication of beneficiaries and automation of all the FPS in the State.
  • ‘Ease of Doing Business’ Reforms:
    • It is to facilitate a better environment and seamless process for entrepreneurs and companies to operate.
    • The reforms stipulated in this category are:
      • Completion of first assessment of ‘District Level Business Reform Action Plan’.
      • Elimination of the requirements of renewal of Registration certificates/approvals/licences obtained by businesses under various Acts.
      • Implementation of a computerized central random inspection system under the Acts.
  • Urban Local Body/ Utility Reforms:
    • These reforms are aimed at financial strengthening of ULBs (Urban Local Bodies) in the States and to enable them to provide better public health and sanitation services to citizens.
    • It required states to notify floor rates of property tax and of water and sewerage charges.This was in consonance with stamp duty guideline values for property transactions and current costs in urban areas.
  • Power Sector Reforms:
    • There are three parameters a state must meet under the power sector reforms - reduction in Aggregate Technical & Commercial (AT&C) losses, targeted reduction in Average Cost of Supply and Average Revenue Realisation (ACS-ARR) gap, and direct benefit transfer (DBT) of electricity subsidy to farmers.

Source: TH