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Increase of Borrowing Limit of States from 3% of GSDP to 5%

If we learn the definition of state borrowing limits, it says that it is the amount that a state can use from their gross state domestic product, which again means that it will be some amount from the state GDP used to provide various facilities. However, for the development of the state, it is essential to let them borrow some of the percentages of their GSDP, which is healthy unless the state registers a fiscal deficit after the whole financial year. Conditions being in debt was the primary reason for taking an extra loan from the central government.

Earlier GSDP borrowing

Before the central government changed the definition of state borrowing limits by increasing the state borrowing percentage from 3% to 5% of their GSDP, states were in significant financial deficit. As a result, they could not fulfil their domestic needs and development. Covid-19 traumatised the people and the budget and story of the states to its lowest potential, and people have suffered much due to it. Earlier definitions of the State’s borrowing limits, some % of their GSDP, were set according to the situation, which had no such pandemic.

The 3% of the previous state borrowing limits were enough extra money for the state to provide every kind of facilities and other schemes and introduce any change and reform in the state. However, some conditions did not borrow anything over their state borrowing limits from the central government and were stable in economic growth. 

Crisis due to covid-19 to the economic growth of the country 

No countries regarded as superpowers were spared by the intense and hardening effects of the covid-19. Every industry except Information technology was closed, which caused direct harmful effects on the economic growth of the states because the revenue collection and other state and centre taxations were diminished significantly.

Growth hurdle and blocked revenue of states which became the reason for the enhancement

Various businesses stopped, and unemployment peaked, which greatly affected the country’s per capita income. Most of the State taxes came from the services like motor fuel tax, liquor, and sales of goods which were the most affected parts of the country. However, due to the lockdown, the government restricted travel. Every shop in the country was closed except essential goods shops, which adversely affected the state’s revenue.

There was a much-needed Definition of state borrowing limits change in the finance budget so that the state could revive the growth and bring essential reforms in the constituency to get the smooth working of the form again. After the increment in the state borrowing limits, subject to their GSDP their Debt to GSDP ratio also dropped significantly. Many new reforms were introduced to subsidise and fund the power sector and other affected sectors of the state.

Now, the states have been recovering from their pandemic effects at a significant rate, the borrowing limits increment is helping to fund those reforms and to bring many other changes in the revenue system by providing subsidies to the citizens so that they could spend more money to earn the benefit and the cash save in the banks comes into the flow.

Enhancement in the borrowing limits permitted to states in terms of their GSDP 

To understand enhancement in the borrowing limits permitted to states in terms of their GSDP, we need to understand the enhancement. The most general and sufficient reason is that state revenue got blocked due to pandemic effects and many state reforms and schemes were hard to implement due to the shortage of funds. In the FY 21-22 budget, the central government gave a brief about enhancing the borrowing limits permitted to states in terms of their GSDP. 

In the budget FY 21-22, the centre needs to get the burden off from the states and permit them almost 1.18 lakh revenue deficit grants to fund their critical reforms to get the cash flow into the state revenue again. In addition, giving an extra 0.5% revenue grants to the 17 states which had many power sector reforms running in the state brought the total enhancement of the state borrowing limits to 5% from 3%, increasing a total of almost 4.28 trillion rupees which was dependent upon the state to state subjected to their specific power sector reforms.


The pandemic pushed the country’s economic growth to its worst phase, which became one of the primary reasons for the enhancement in the state borrowing limits from the central government so that they could carry out much-needed reforms in the essential sector. However, the state revenue deficit became the primary reason for the positive push of the GSDP and GDP of the country, as stated by the government of India in FY 22-23. Pandemics do not come with invitations to the government but how much we are ready to deal with any kind of crisis shows our country’s financial independence and reforms.


Frequently Asked Questions

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Did the pandemic affect the centre too?

Ans. Yes, the pandemic did affect the centre budget, revenue, and GDP of the country. However, due to the increase i...Read full

Will increased state borrowing limits help to get the revenue system stable again?

Ans. Yes, increased state borrowing limits will help the state governments bring various essential reforms and funding to the highly affected power...Read full

Will every state get the same extra percentage of borrowing from the centre?

Ans. The central government changed the definition of state borrowing limits by changing the percentage subjective to the GSDP given to the states ...Read full

What was the revenue deficit announced by the finance minister?

Ans. The state’s commitment to fiscal federalism was considered a sign of commitment to the commission, which ...Read full