Reform Linked Borrowing
Reform Linked Borrowing: New Model of Public Financing
Recently, Prime Minister said Reform-linked borrowing by states new model of public finance
Conditionalities attached to increased state borrowing limits are against the spirit of cooperative federalism. Comment?
About Reform Linked borrowing:
● In May 2020, as part of the Atma Nirbhar Bharat package, the Centre had announced that state governments would be allowed enhanced borrowing for 2020-21. An extra 2% of GSDP (gross state domestic product) was allowed, of which 1% was made conditional on the implementation of certain economic reforms.
● This was a nudge, incentivising the States to adopt progressive policies to avail additional funds.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.
● The four citizen-centric areas for reforms identified were:
o Implementation of One Nation One Ration Card System
o Ease of doing business reform
o Urban local body/utility reforms
o Power sector reforms.
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.
One Nation One Ration Card System (ONORC) Reforms:
● Aim of this reform
o To better target beneficiaries, elimination of bogus/ duplicate/ ineligible ration cards Enhance welfare and reduce leakage.
● Reform conditions stipulated for it are:
o Aadhar Seeding of all Ration Cards, biometric authentication of beneficiaries and automation of all the FPS in the State.
Advantages of Reform Linked borrowing Policy
Shift in approach:
● The reform-linked borrowing by states amounts to a new model of public finance in India.
● This approach marks a shift from a model of ‘reforms by stealth and compulsion’ to a new model of ‘reforms by conviction and incentives’, which would be more efficient and effective.
Nudge for reforms:
● In a country plagued by undue operational delays of schemes and reforms, this nudge for reform is a much welcome move. Experts have suggested that without the incentive of additional funds, the enactment of the proposed policies would have taken years.
Public friendly reforms:
● The proposed reforms were both directly and indirectly linked to improving the ease of living for the public.
Promoting fiscal sustainability:
● This model promoted fiscal sustainability in the long run while also raising adequate resources for public welfare.
Critique on these conditionalities on borrowing:
● Against the Cooperative Federalism:-Thrusting such conditionalities in times of distress is against spirit of cooperative federalism
● Asymmetry of Power:- It sets a precedence of centre dictating to states and reducing the latter into agents of the former. It leads to asymmetry of power between states and centre. Centre can then impose conditionalities irrespective of merits.
● One size fits all approach:- States have varied circumstances and one size fits all approach will not work. Example is power sector reforms proposed. Some states like Gujarat and West Bengal are better placed than others like Andhra Pradesh, Punjab, Tamil nadu
● Reluctance from States for politically difficult conditionalities. DBT to farmers for power subsidy is an example. In such cases, states will forego additional borrowing. This will lead to reduced funds availability and cut of expenditure.
● Competitive federalism provides better incentives than imposition. Ease of doing business is a case of the same.
● Some reforms proposed are not permanent and can be reversed. Property taxes, power tariffs are examples which can be reverted back in future.
While there is a need for reforms proposed as conditionalities, effectiveness of imposition of the same is questioned. Instead, these reforms need to have been discussed with states and implemented by individual states as per their circumstances.
The new model of public finance can be a game changer as it helps India move towards an era of reform by nudges strengthening cooperative federalism in the country.