1. Infrastructure: Narendra Modi led Cabinet allows external agencies to lend directly to state bodies

Infrastructure: Narendra Modi led Cabinet allows external agencies to lend directly to state bodies

Upon fulfilment of certain conditions by the state government bodies, the state government concerned will furnish guarantee for such loans, while the Centre will provide counter-guarantee

By: | New Delhi | Published: April 20, 2017 6:42 AM

The Cabinet on Wednesday allowed state government entities that are financially sound to borrow directly from the country’s bilateral official development assistance (ODA) partners for implementing critical infrastructure projects. It also permitted the Mumbai Metropolitan Region Development Authority (MMRDA), a state government entity, to borrow directly from Japan International Cooperation Agency (JICA) in the form of an ODA loan for the implementation of the Mumbai Trans-Harbour Link (MTHL) project. Of the estimated project cost of `17,854 crore for the MTHL, the JICA loan is expected to be as much as `15,109 crore.

The move came amid realisation that several infrastructure projects being implemented by state government agencies, even if viable and sound, have huge funding requirements and borrowing by the state governments for such projects may exhaust their respective borrowing limits. So, in order to accelerate the pace of investment in major infrastructure projects without compromising on the need for external assistance for other sectors, an enabling provision in the existing guidelines was considered necessary to facilitate direct borrowing by the state government entities from bilateral external agencies, the finance ministry said after the Cabinet meeting.
Upon fulfilment of certain conditions (by the state government bodies), the state government concerned will furnish guarantee for such loans, while the Centre will provide counter-guarantee. Such a dispensation will allow the financially-sound state entities to directly borrow and repay the loan required for major infrastructure projects without burdening the state exchequer. Analysts say such borrowings by state government bodies won’t be accounted as the debt of the state governments, so they won’t worsen their fiscal deficit (these will be part of the state government guarantees). But rating agencies will factor in such borrowings as part of their overall assessment of state finances. The Cabinet decision, although aimed at gathering necessary funds to complete infrastructure projects early, also stokes fresh fears of loosening fiscal discipline, especially by states. Importantly, while the Centre has been adhering to fiscal discipline in recent years, the fiscal deficit of states is expected to have touched a 13-year high of 3.4% of their GDP in 2016-17, threatening to reverse gains from the centre’s restraint. Between FY13 and FY17, while the center has cut its fiscal deficit from 4.9% of GDP to 3.5%, states’ deficit has gone up from 2% of their GDP to an expected 3.4% this fiscal, according to a report by JP Morgan’s chief India economist Sajjid Chinoy and associate Toshi Jain.
As such, state governments’ gross market borrowings are expected to rise even further to `4.5 lakh crore in FY18, against `3.7 lakh crore in FY17, on the expectation of rising fiscal deficits led by the pay revision and servicing of the UDAY debt, a spike in debt repayment from FY18 onwards, and the exclusion of most state governments from investing in the National Small Savings Fund from April 1, 2016, according to Jayanta Roy, group head (corporate sector rating) at ICRA.

  1. No Comments.

Go to Top