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G. Srinivasan

As loans accruing to the consolidated fund of State Governments are largely swayed by the fiscal stance of the Centre, the latter is in a sound position to restrict the net borrowing level of States within limits deemed appropriate by financial planning.

NEW DELHI, Feb. 19

THE Planning Commission has faulted the Union Government for not putting to effective use the Article 293 of the Constitution so far which allows it to monitor as well as shape the desired level of net borrowings of States.

According to a working group report on States' resources for the Tenth Plan (2002-07) to be incorporated into the final document of the Tenth Plan, the Centre has not so far put to effective use the Article 293. This is reflected in its liberal fiscal stance during the 1990s, which allowed the debt burden of States to increasingly become "unsustainable" with implications for a rising debt-servicing burden. As such, it said, "a tighter fiscal stance is a pre-requisite for ensuring an adherence to the target of net borrowings."

As loans accruing to the consolidated fund of State Governments are largely swayed by the fiscal stance of the Centre, the latter is in a sound position to restrict the net borrowing level of States within limits deemed appropriate by financial planning. "In fact, if this could be done then it would also persuade States against seeking ways and means advances from the Centre, as some special category States have been lately doing to tide over their temporary resource crunch."

Stating that Article 293 of the Constitution allows the Centre to monitor as well as shape the desired level of net borrowings of States, it said that only its effective implementation is required. Better still, States might first be motivated to report their own requirements of net borrowings assessed on the basis of sound financial norms as provided under Article 292 of the Constitution, it said.

As recent trends reveal, borrowings accruing under the purview of Article 293 are not the only borrowing options available to State Governments. States have raised considerable "off-budget" loans through their State public sector units from both public financial institutions (PFIs) and private placements. The mechanism of issuing State guarantee providing for full transfer of repayment and debt servicing liability to the State Government budget has been used to facilitate this. The enormity of this resource could be gauged by the fact that total guarantees outstanding at the end of 2000-01 stood at around Rs 1,20,000 crore and comprised six per cent of gross domestic product.

The infirmity, which the mechanism of State guarantee entails, is that it bypasses or at best makes a cursory reference to project evaluation against which resources are raised by the PSU concerned. As a consequence, the viability of the project is not established and when the project in question is unable to yield returns adequate to fund the debt servicing obligations, the liability passes on to the State budget. The State Government accommodates this by augmenting its investment outlay to the PSU concerned under capital budget. Consequently, the fiscal deficit increases or at the same level curtails important outlays. In any case, the capital budget mistakenly gives the picture of additional physical facilities provided by State Governments, it noted.

In a situation of resource crunch, "off-budget" resources provide the necessary resource padding.

But it is not desirable that these along with borrowings taken against the consolidated fund exceed the overall target of net borrowings.

As such, it is necessary that State Governments' budgets report "off-budget" borrowings for enabling a precise assessment of their total debt burden.

As many a times off-budget borrowings end up being used for unproductive purposes with the Centre being not able to do anything as these do not fall under the purview of Article 292, it is here that public financial institutions (PFI) should be asked to do the requisite correction, the report said.

PFIs ought to be persuaded by the Centre to seek State guarantee only after establishing the viability of the project seeking assistance.

Along with the State guarantee, an arrangement must be made to provide full budgetary provision of contingent liabilities into an escrow account operated by a mutually agreed arbitrator like the Reserve Bank of India, it said.

In the presence of an escrow account kind of pact, contingent liabilities would acquire a real face and precisely reflect the debt burden of State Governments, it added.

Finally, to restrict the debt burden within the realms of net borrowing targets, a cap on State guarantee is a must.

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