During FY2021-FY2026, the Government of India (GoI) and/or the 15th Finance Commission (FC) permitted additional borrowings to the state governments that were over and above the base borrowing limits affixed for those fiscals. Such additional borrowings were allowed to states mainly to incentivise them to undertake reforms in prescribed areas and also to augment their capital spending. While the states’ base borrowing limit was between 3.0-4.0% of the Gross Domestic State Product (GSDP) during FY2021-FY2026, an estimated additional borrowing of 0.5-1.1% of the GSDP (including interest free capex loans from the Centre) over and above the base limit, allowed many of them to incur a fiscal deficit higher than 3% of the GSDP.

EXHIBIT: Resources as proportion of GSDP available for 28 states to finance their fiscal deficit

Source: State Budgets; CAG; NSO; FC reports; Lok Sabha questions; Rajya Sabha questions; ICRA Research