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SBI Suggests Ways for the Center to Provide Financial Support to States


Local lockdowns and spewing coronavirus case records have a substantial negative impact on economic activity across states. There is a must need for financial support to these states in some form or another. The economic slowdown is affecting the central government and keeping it from providing efficient and sufficient assistance to the states. However, SBI research says that an option is available to the center to make a direct transfer of an integrated full amount of 54,000 Crores INR from the SDRMF and NDRF.

The recent SBI Ecowrap report propounded ways for a rescue, through which the central government can help the states without making a substantial depletion. The report explained how the center could make a direct transfer of about 54,000 crores INR, all integrated from the State Disaster Response Fund (SDRMF) and National Disaster Response Fund (NDRF) (1).

SBI Research’s Suggestion to the Decision of the Center

The SBI research findings denoted the center’s decision to increase the borrowing limits of states. As per the latest verdicts, the center is now allocating 4.28 Lakh crore INR to the state. However, the state may get only 3.13 lakh crore INR as actual borrowing from the central government in the current financial year. The research showed that only eight states are in the position to attain all the government’s conditions and can aid 2 percent of GDP as extra borrowing.

Further, by supporting additional borrowing of states through Open Market Operations by RBI and loosening some of the conditional ties associated with lending, the government may transfer at least half of the remaining 2.5 lakh crores INR through an additional hike in WMA limits.

In their report, the SBI (State Bank of India) unfold that the states are most at risk as they have limited source of own tax revenue. The pandemic may lead to a loss of 3 lakh crores INR in Own Tax revenue across states, and the fund transfer to the states will brace health and immediate payment to the contractors for infrastructure work. The move will most probably shrink the stretched working capital cycle and boost employment and demand.