States already have the option to borrow between 5 per cent and 35 per cent of their annual debt through auctions. However, no state has ever raised funds through auctions.

Traditionally, the Reserve Bank holds fixed-rate auctions for state governments twice a year -- in April and September -- and the loans are of a longer tenure, like, say, ten years. In fiscal 1999, 24 state governments raised Rs 5,123.74 crore through a 10-year, 12.15 per cent paper on April 20. The paper was heavily oversubscribed. Initially, 25 state governments planned to raise funds, but the Bihar government pulled out its Rs 220-croreborrowing plan citing technical reasons. The move to let state governments borrow funds at market-determined rates is in line with the central bank's determination to put an end to the era of fiscal imprudence of state governments. The Reserve Bank has, to a large extent, disciplined central government finances by replacing the three-decade-old ad hoc issue of securities with ways and means advances. Under the agreement, the central bank issues loans at market rates to the central government once it breaches the WMA limit agreed to at the beginning of the year.

Even though some of the state governments have agreed to shift to auctions for a portion of their market borrowings, the change is unlikely to materialise in the current fiscal, the finance secretary of a state government said. The cost of borrowing for weaker states will go up substantially once auctions are introduced.

Relatively stronger states like Maharasthra, Gujarat and Karnataka will be able raise recources at cheaper rates, while weakersiblings like Bihar, Orissa and the north-eastern states are likely to face problems, sources said.

In 1997-98, 16 states resorted to overdrafts. As many as nine states resoted to frequent overdrafts compared with eight states in the earlier year. Analysts say that this points to a persistent stress in liquidity management and the underlying structural imbalances in the states' finances.

In 1997-98, three states could not clear their overdrafts with the Reserve Bank within the stipulated time of 10 consecutive working days.

Consequently, the central bank stopped payment on behalf of these state governments.