India’s central bank eases buffer fund rules to release funds to states

In addition to the benefit of borrowing costs being reduced in the light of the liquidity enhancement resulting from the monetary steps unveiled by the RBI, the state governments can now withdraw funds from the reserves kept by them with the RBI to meet exigencies.

The relaxation of withdrawal norms for the so-called consolidated sinking funds (CSF) for the period till FY21-end will release an extra Rs 13,300 crore, which is expected to help the states meet about 45% of their redemption obligations for the fiscal.

States like Maharashtra, Gujarat, Odisha, West Bengal, Andhra Pradesh, Bihar and Tamil Nadu  which have managed to keep large amounts in the CSF reserves, will benefit the most

The CSF is a reserve fund created by states for amortisation of their debt obligations. Under the CSF scheme, a state government could contribute 1-3% of their annual outstanding debt liabilities to the fund to create a buffer for repayment of their future liabilities. Set up in 1999-00, the CSF has accumulated reserves worth Rs 1.3 lakh crore for 23 states as on March 31, 2020.

Recently, the Centre has raised the borrowing limit for the states to 5% of their respective gross state domestic product (GSDP) from 3% earlier, in a move that could theoretically make available an additional Rs  4.28 lakh crore to all states combined.

The RBI had earlier enhanced the ways and means of advances to states by 60% (from the level as on March 31) to about Rs 51,560 crore for H1FY21, to encourage the states to spread out their borrowings. Also, the Centre has transferred total amount of Rs 92,076 crore to states as tax devolution for April-May, sticking to the Budget target and notwithstanding the huge tax revenue shortfall the Centre itself is facing. Also, a total of Rs 12,390 crore has been released to the eligible states as revenue deficit grants in April-May, 2020.

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