States seek access to cheap funds, ECBs

Written by Sanjay Jog | Mumbai | Updated: Feb 21 2009, 05:59am hrs
Funds crunch
Faced with a fund crunch, states have sought the Centres permission to access cheap funds from local and international markets and retire their expensive debt. In separate representations to the Centre and the Thirteenth Finance Commission, states have suggested external commercial borrowings as an option to meet their rising fund needs.

States have also sought retirement of half the debt they owe to the National Small Savings Fund (NSSF) and a reduction in the interest rates on all loans under NSSF. The interest rates could be aligned to open market borrowing (OMB) rates or market rates of government securities, the states suggested.

Revenues of states have shrunken considerably over the past six months from the economic slowdown, with many states reporting steep falls in their year-on-year revenue growth. This, in turn, is delaying their investment plans. Acting finance minister Pranad Mukherjee said on Thursday st ates had sought Rs 20,000 crore from the Centre to tide over the financial squeeze and keep their infrastructure projects going.

Another upset for the states is a reduction in their share of central taxes and duties. States would get over Rs 18,000 crore less from the transfer of the Centre's tax collections for the current fiscal against the original plan, as overall tax revenues of the Centre has dwindled. The Union would transfer only Rs 1,60,000 crore to states this fiscal against Rs 1,78,000 crore provided for in the Budget estimate.

Though the Centre has allowed states to borrow Rs 30,000 crore from the marketby easing their borrowing limits for the current fiscal year to meet capital expenditurestates borrowings have been rising to almost unsustainable levels. The debt burden of Maharashtra, for instance, has risen to Rs 1,56,075 crore this fiscal, from Rs 82,500 crore in 2002-03. With such high levels of borrowing, debt servicing eats up a major share of states revenues. This creates a vicious circle. Thats why the states are asking for a reduction in interest rates and cheaper borrowing options.

Sources told FE that States have welcomed Mukherjee's announcement in the interim Budget to relax targets under the Fiscal Responsibility and Budgetary Management (FRBM) Act. However, states argued that while they have been given freedom to raise money either through the small saving instruments or through OMB, such freedom is not extended to other cheaper sources for funds. There is always a need to allow the states to freely access domestic and international markets and to roll over or swap their existing debt with new and cheaper loans without adding to the overall debt stock.

Sources added, The states are not allowed to tap into ECBs, which are the cheapest source of finance today, though large corporate houses are allowed to tap into this source at will.

The state governments and their subordinate bodies are not allowed to directly approach the multilateral bodies for funding. The procedures of getting the approvals within the Union government are sometimes more tortuous than those of the lending institution themselves. Such restrictions need to be totally removed. Moreover, states have demanded that their debt problem be more comprehensively reviewed by the Finance Commission, taking into account their total loan burden, including the NSSF loan and loans of all other ministries. Effective debt relief measures need to be recommended by considering a reduction in the interest rate on loans, particularly NSSF loan, and by writing off a part of the debt. While the small saving instruments are typically for tenures of 5 to 7 years, the loans to state governments are generally for 25 years. This means that although a substantial part of the Centres liability stands discharged at the end of 5 to 7 years, states continue to pay higher interest rates long thereafter.