New Delhi: The central government has tightened borrowing norms for states. If funds are provided to states for centrally sponsored schemes by 1 April 2024 and remain unutilised by 1 April 2025, the unused amount will be deducted from the borrowing limit for 2026.

In addition, if public sector institutions undertake loans under government guarantees and use them for welfare activities, the borrowed amount will also be counted against the state's borrowing limit. Similarly, if arrears owed to electricity distribution companies exceed 4.5%, the excess amount will be deducted. Unspent funds from centrally sponsored schemes will be adjusted against the borrowing of the year in which they were allocated.

These tighter restrictions come after the decision to reduce allocations to the Guarantee Redemption Fund (a loan repayment fund). The annual borrowing limit for states is determined based on the recommendations of the Finance Commission and currently stands at 3% of the state's Gross Domestic Product (GDP). However, this limit can be raised to 4.5% if the states adopt reform measures proposed by the Centre, particularly in the power sector.

Borrowing Limits Can Be Increased in the Following Ways:

  • If liabilities of electricity distribution companies are absorbed by the state—either as subsidies or otherwise—the borrowing limit can be increased by 0.5% of the state's GDP.
  • Contributions made to the National Pension System (NPS) can also open up additional borrowing capacity.
  • When public sector enterprises borrow from financial institutions under sovereign guarantees (i.e., with the state guaranteeing repayment), the Guarantee Redemption Fund must be increased to 5% of outstanding guarantees. Failure to comply could result in a reduction of up to 0.25% in the borrowing limit.

The Comptroller and Auditor General of India (CAG) has decided to establish a special unit to audit 1,600 public sector undertakings owned by state governments. This initiative aims to assess their liabilities and ensure greater fiscal transparency.