State governments can now borrow an additional 0.5 per cent of their gross state domestic product to tackle the economic slowdown.
The states will be able to raise additional open market loans of about Rs 21,000 crore (Rs 210 billion) in the current year, according to the 2009-10 Budget estimates presented on Monday.
This has been made possible as finance minister Pranab Mukherjee relaxed the fiscal deficit target under the Fiscal Responsibility and Budget Management Act to four per cent of the states' GDP from 3.5 per cent.
Thus, the total additionality in the plan expenditure by Centre and the states put together would be Rs 61,000 crore (Rs 610 billion) over the Interim Budget.
"I do believe that this fiscal expansion will go a long way in reversing the impact of slowdown and accelerate growth revival in the medium term," Mukherjee said.
According to Budget estimates of 2009-10, the states' share of taxes and duties is expected to increase to Rs 1,64,361 crore (Rs 1,643.61 billion) against Rs 1,60,179 crore (Rs 1,601.79 billion) in 2008-09.
The total grants and loans by the centre to the states are proposed to increase to Rs 1,52,051 crore (Rs 1,520.51 billion) in the current fiscal against Rs 1,35,190 crore (Rs 1,351.9 billion) in the last fiscal.