The centre today raised the borrowing limit for states and relaxed debt relief guidelines, allowing states to borrow an additional Rs30,000 crore to step up capital expenditure and thereby operationalising the second stimulus package to boost the economy.

The states will be allowed to raise in the current financial year additional market borrowings of 0.5 per cent of their gross state domestic product (GSDP), amounting to about Rs30,000 crore, for capital expenditures, the government said in a press release.

''Consistent with recommendations of the Third Finance Commission (TFC), the finance ministry has allowed states to borrow up to 3 per cent of their respective GSDP during the year 2008-09. States that are on the fiscal correction path recommended by TFC get debt relief as recommended by the TFC,'' the press release said. 

The union finance ministry fixes the annual borrowing ceiling for states as per the fiscal deficit targets recommended by the finance commission and accepted by the government.

For operationalising debt relief to states, the finance ministry has formulated Debt Consolidation and Relief Facility (DCRF) guidelines.

To give effect to this decision the cabinet has decided:

(i) to relax the DCRF guidelines for the current year (2008-09) by modifying the fiscal deficit targets as 3.5 per cent so as to enable the states to borrow up to 3.5 per cent of their respective GSDP during 2008-09 as one-time relaxation for undertaking capital expenditures. In addition, the DCRF requirement of elimination of revenue deficit is also relaxed for 2008-09.  These states will not lose benefits of DCRF, provided they achieve the 3 per cent fiscal deficit target in 2009-10 and maintain revenue balance in 2009-10. Such states will have to suitably amend their respective FRBM Acts.

(ii) As regards the states which opt to borrow in excess of 3.5 per cent of their GSDP, MoF will consider additional market borrowings during 2008-09 up to 0.5 per cent of their GSDP for undertaking capital expenditures. These states will suffer forfeiture of the benefits of DCRF.

(iii) The finance ministry  would write to the 13th Finance Commission to make appropriate adjustments in respect of debt relief granted under DCRF.