• Vedant Kanade

What is the problem in taking a loan from RBI?

Borrowing money and spending it with fanfare is a dream day for any politician. Then why are they furious on taking a loan which is offered on lower interest by the central government?

This is mainly because borrowing money will be a liability as against the compensation cess which was supposed to be income in the first place.

Consider this, you worked for some project and after completion of work, instead of paying in cash, you are offered a loan at some interest.

Crazy thought right!! So in this case, states are treated the same way. Another important issue is that states have very limited capacity to borrow and almost no money to repay that loan.

Consider the situation of Maharashtra, one of the largest and wealthiest states in our country, which contributes about 13% to India’s GDP & its capital Mumbai contributes about 33% of India’s income tax kitty. It has expected fiscal deficit of 2.73% by end of Mar 2020 of its GDP.

As per FRBM framework states can have a maximum fiscal deficit of 3%. After COVID-19, Maharashtra revenues are dried like any other state but expenditure on salary, pension and healthcare can not be avoided.

Now after 5 months into the lockdown and pandemic ravaging in almost all major cities in the state, the state government is struggling to meet its basic obligations and situation likely to go worse. GST compensation of about Rs.22000 crore is yet to be received from central government and revenue from liquor, stamp duty will not be sufficient to run a huge state like Maharashtra that too when health expenditure in a pandemic is its responsibility.

If a state with resources is struggling then agriculture state like MP, Punjab and tourism dependent northern states like Uttarakhand will be bankrupt in a month if this situation continues.

The economy, in reality, has to be fed with a combination of expenditure and investment. This feeding happens from tax collections, mainly income tax ( individual & corporate) and GST collections (indirect tax). One feeds on another, but in the current situation, it can be said that one eats on another.

To get out of this vicious downward cycle, the government of India has to spend and put money in hands of the bottom 70% population.

Though this method looks opposite to the position taken by the chief economic advisor, I must say how and how much to spend is a political-economic decision for another article perhaps.