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C. Shivkumar

State Government officials said that attempts were being made to limit such borrowings. But this was becoming increasingly difficult.

BANGALORE, Aug.1

UNBRIDLED off-budget borrowings are pushing States such as Karnataka to the brink of a debt trap. Such borrowings are already close to about two per cent of the State domestic product (SDP).

Off-budget borrowings this year have been estimated at Rs 1,480 crore for the current fiscal. But more than three quarters of the borrowings would be required to meet the interest and principal liabilities of past borrowings, estimated at Rs 1,190 crore, sources said here.

This figure however is an understatement, since some of the off-budget borrowings made are in the form of term loans accessed from the financial institutions.

Besides, the sources said that some of the loans had been contracted on the strength of letters of comfort by the State Government. If these components were also factored in, the actual debt stock of off-budget borrowings would likely be in the region of 3 per cent of the SDP, they added.

State Government officials said that attempts were being made to limit such borrowings. But this was becoming increasingly difficult as few of the borrowing entities were in a position to meet the interest and principal servicing liabilities. Further, the sources said the only method of limiting such borrowings were through limiting guarantees. Karnataka already has a legislative ceiling on guarantees to the extent of 80 per cent of the revenue receipts.

This technically means that the outstanding guarantees available for the current financial year are in the region of about Rs 2,000 crore.

But special purpose vehicles like the Krishna Bhagya Jala Nigam Ltd and Karnataka Neeravari Nigam Ltd were out of the purview of this ceiling. These two agencies are the largest borrowers in the State and neither of them has begun generating adequate cash flows. Besides, the guarantees provided to these agencies are not funded.

Instead budgetary transfers to these agencies are credited to a revenue escrow account for the trustees to draw in the event of shortfalls in meeting the interest servicing. This year, the sources said, with reservoir inflows low, the State Government is expected to face additional revenue pressures. These pressures are mostly in view of shortfalls in tax flows and higher expenditure on drought relief measures.

The flows would have to be met through Central transfers (through a combination of grants and low interest loans).

But utilities earnings, especially power utilities, are also expected to be hit. The shortfalls would either have to be supported through budgetary transfer or borrowings.

Since slippages in revenue receipts are already anticipated, utilities shortfalls would have to be met through additional borrowings, to meet their respective revenue expenditures. Such borrowings in turn would bring in additional pressures, the sources said.

Besides, what was hurting the States was the high costs of such off- budget borrowings, which are being made at rates upwards of 11 per cent - almost 4 per cent above sovereign rates, indicative of the credit risk perception of State Government guarantees.

In fact, private corporate borrowers have been able to obtain better terms from lenders and bond subscribers at rates below the prime lending rates.

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