Defaulty Foundations

Updated: Jun 27 2003, 05:30am hrs
There is no better indication of the rapidly deteriorating fiscal condition of state governments than the increasing defaults of guarantees. While state governments are not directly rated by the rating agencies, a default of a state government-guaranteed financial instrument indicates the falling creditworthiness of that particular state. For instance, when Maharashtra was downgraded by Crisil a couple of years ago, it was on account of the state governments inability to meet its obligation towards the guarantee from its own resources. While the Indian Banks Association data does not present a state-wise break up, one can safely assume that the states have done little to check, leave alone reverse, the trend. While the overall default rate has gone up by over 14 per cent, what is more worrisome is the 23 per cent increase in default for loans extended to state government undertakings. Obviously, the money lent to a particular undertaking for a specific purpose could easily have been diverted to various non-productive avenues.

State governments often guarantee loans made for irrigation and other infrastructure projects including electricity boards. In the former, returns are not direct while in the latter, they are unpredictable. Take the case of Maharashtra Krishna Valley Development Corporation (MKVDC). Money was raised for the project on the basis of a state government guarantee, but the state neither ensured that its internal resources were augmented to meet the payment obligations towards MKVDC nor does it have enough resources at present to meet its obligations. Thus, through some skullduggery in the public accounts of the state, it plans to avoid default. Well, the state may be diverting money from its Contingency Fund so that its not downgraded again. One indeed wonders that if this is the current position of a state which was rated very highly in the past, how much worse is the condition of states such as Uttar Pradesh and Bihar In fact, even for a highly rated state such as Tamilnadu, the outstanding guarantees as on 31st March, 2001 were 68 per cent of the likely revenue receipts. It is for this reason that the Constitution allows states to fix a ceiling on the guarantee limits. But unfortunately this does not seem to have worked. Repeatedly, various Union finance ministers and the Reserve Bank of India have mentioned schemes to improve state finances and curtail defaults, which again have not worked. If India needs to be an economic power, the states which are a foundation for the same have to be strengthened. A default in the foundation endangers the entire structure.