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Wednesday, Oct 19, 2005


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States hard-pressed on debt front

G. Srinivasan

While some States found the extant debt ceiling adequate for financing their Plans, some view it deficient.

New Delhi , Oct. 18

STATES groaning under the heavy burden of rising debt today are aggrieved over the limited room for manoeuvre in managing the crushing weight of debt, which is further compounded by the hard policy options of the Finance Ministry. Their collective concerns on the debt front came to the fore at a recent meeting of State finance secretaries held under the umbrella of the Planning Commission here.

Highly placed sources in the Government told Business Line here that States by and large felt that the debt ceiling conveyed to them by the Finance Ministry was a repetition of last year's level. Many States found that they had to wrestle with several ceilings — the ceiling fixed by the Finance Ministry based on the medium-term fiscal reform programme (MTFRP), the ceiling fixed in their own Fiscal Responsibility and Budget Management (FRBM) Acts and the debt limit required for Plan financing. States contended that ceilings should be fixed contingent on repayment capacity and flows of both resources and expenditure.

While some States found the extant debt ceiling adequate for financing their Plans, some view it deficient and some expected it to become inadequate in future when their Plan size increases. Some said though their debt ceilings were higher than what the Finance Ministry had assessed as likely to supervene in terms of all sources of identified debt, including the National Small Savings Fund (NSSF), the Finance Ministry has not authorised them to raise the market borrowings they were entitled to. Genuinely these States apprehend that delay on the part of the Finance Ministry here would deprive them of the resources to fund their developmental Plans. Kerala highlighted this, the sources said, adding that a State like Uttar Pradesh would also have this problem.

Under Article 293 (3) of the Constitution, approval is to be given by the Central Government for each item of borrowing when a State Government makes a plea. But well-nigh all States sought the debt ceiling to be fixed as a single figure with leeway provided to them to choose the source of borrowing after assessing project requirements, yield to maturity ratios and so on. The preferred option was for lower cost market borrowing.

A particularly worrisome point made by several States pertains to the enforced transfer of NSSF as loan to them in the current year, which is contributing to their surpassing the debt ceilings of the Ministry of Finance and/or the FRBM. It causes them to cut or substitute other sources of revenue, including negotiated loans and even tax and non-tax resources. It is thus fostering distortions in financing and resource-raising priorities.

For managing the inflow of NSSF, which is acting as a drag on the development of States as they are compelled to borrow from this expensive route, several suggestions were made by the States. The Union Government could share the burden, cut interest rate on NSSF loans to States to 8 per cent and limit NSSF to certain percentage of the total borrowings of a State or a range of the total borrowings. While allowing States to borrow from the total NSSF inflows of all States, a fixed proportion of NSSF inflow be earmarked for capital investment, including debt reduction.

West Bengal has sought debt relief on NSSF loans and is optimistic that it can come close to TFS deficit targets if this relief is extended.

States also are exercised by the manner in which additional NSSF flows, which are not immediately needed for Plan financing, could be invested in the short-term so that at least the cost of funds (interest cost) could be covered. But currently this is not possible since NSSF could be invested only in Central Government bonds, which fetch 5 to 6 per cent interest against 9.5 per cent average paid on NSSF loans!

The States also underlined the need to fix the debt ceiling well in time and indicate to what extent it should encompass internal and extra budgetary resources (and extra budgetary borrowings. Several States also raised the issue of debt write-off. As per the TFC recommendations, State governments have to adhere to the fiscal deficit level of 2004-05 to avail themselves of the debt write-off scheme, but it is not made clear to them which deficit level should be adopted — the budget estimate level, the revised estimate level or actual. The last will be available only after a lapse of time.

The TFS has recommended that enactment of an FRBM in the prescribed format should entitle a State to debt relief and States that have adopted FRBMs are seeking debt relief. But no orders have been passed on these claims, which is disturbingly swelling their outflows on debt servicing and affecting the balance from current revenue and the availability of resources for Plan financing.

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