New rules to allow financially sound state government entities to borrow directly from other countries which give Official Development Assistance for major infrastructure projects

Details of the decision

• Union Cabinet has approved new rules to allow financially sound state government entities to borrow directly from other countries.
• The state government concerned will give a guarantee and the Centre will provide a counter-guarantee.
• The existing guidelines did not allow direct borrowing by state government entities from external agencies.

Need for the decision

• Several state agencies were implementing infrastructure projects of national importance.
• These projects, even if viable and sound, have huge funding requirements.
• Borrowing by state governments for such projects might exhaust their respective borrowing limits.
• The country has an estimated funding requirement of Rs 43 lakh crore ($646 billion) for infra projects over the next five years.
• About 70 per cent of this would be needed in power, roads and urban infrastructure.

Current practice

• Presently, external development assistance from bilateral and multilateral sources is received by the Government of India.
• A state government is allowed to borrow to the extent that its fiscal deficit does not exceed the limit of three per cent of its gross state domestic product (GSDP).
• The 14th Finance Commission provided a further flexibility of 0.5 percentage points to states, subject to stiff conditions.

Conditions for new agreement

• All repayment of loan and interest to the funding agencies will be directly remitted by the borrower concerned.
• The concerned State Government will furnish guarantee for the loan.
• The Government of India will provide counter guarantee for the loan.

First of such project

The Mumbai Metropolitan Region Development Authority (MMRDA), a State Government entity, has also been allowed to borrow directly from Japan International Cooperation Agency (JICA) Official Development Assistance (ODA) loan for implementation of Mumbai Trans Harbour Link (MTHL) project. The estimated project cost for Mumbai Trans-Harbour Link (MTHL) is Rs.17,854 crore, out of which JICA loan portion is expected to be Rs.15,109 crore.

Source : Business Standard, PIB

GS III : 1. Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment 2. Infrastructure: Energy, Ports, Roads, Airports, Railways etc