Debt write-off plan mooted

12TH FINANCE COMMISSION REPORT/ DEBT RELIEF

The 12th Finance Commission has recommended a new debt relief scheme, which includes rescheduling of central loans to states and a debt write-off scheme linked to the reduction of revenue deficit of states in place of the Fiscal Reform Facility (FRF).

"The commission does not recommend continuation of the FRF over 2005-10 as despite its operation, the aggregate fiscal deficit of states has actually increased from 4.64 per cent of the gross domestic product in 1999-2000 to 4.97 per cent in 2003-04 as compared with the 11th Finance Commission's reform scenario projection of 2.9 per cent of the GDP by 2003-04," it said.

It pointed out that the scale of incentive fund of the FRF was not able to provide adequate incentives to counter the short-term rewards of imprudent fiscal behaviour by states.

It has suggested that all central loans to states, contracted till March 2004 and outstanding as on March 31, 2005 (amounting to Rs 1,28,795 crore), may be consolidated and rescheduled for a fresh term of 20 years (resulting in repayment in 20 equal instalments), and an interest rate of 7.5 per cent.

This will, however, be subject to states enacting a fiscal responsibility law and will take effect prospectively from the year in which such legislation is enacted.

It has also proposed a debt write-off scheme linked to the reduction of revenue deficit of states under which repayments due from 2005-06 to 2009-10 on central loans contracted up to March 2004 and recommended to be consolidated will be eligible for write-off.

The write-off of repayment will be linked to the absolute amount by which the revenue deficit is reduced in each successive year during the five-year period. Hence, if the revenue deficit is brought down to zero, the entire repayment during the period will be written off.

The commission has suggested that all states should set up sinking funds for amortisation of loans including loans from banks and liabilities on account of the National Small Savings Fund (NSSF) to improve their credit rating when they apply for loans.

It has suggested that the fund should be maintained outside the consolidated fund of states and the public account and should not be used for any other purpose, except for redemption of loans.

As per the finance ministry, there will be a bunching of payments in 2013-15 when all the additional open market borrowings (expected to be over Rs 45,000 crore) will mature in a span of three-five years.

The states will experience lumps in their servicing profile. This necessitates the constitution of a fund for repayment of debt.

While suggesting that states should be allowed to borrow from the markets directly, the commission has also suggested that in case of fiscally weak states, the Centre could borrow for the purpose of on-lending to the states, but the interest rates should remain aligned to the marginal cost of borrowing for the Centre.

The external assistance should be passed on to the states on the same terms and conditions imposed by the external funding agencies, it said adding that such assistance should pass through to the states through a separate fund in the public account.

In view of the rising trend of guarantees, the commission has recommended that all states should impose a ceiling on guarantees through the mechanism of their fiscal responsibility legislation.

Also in order to provide for sudden discharge of the states obligations on guarantees, it has suggested that states should also set up guarantee redemption funds through earmarked guarantee fees.

It has also suggested that the moratorium on repayments and Rs 3,772 crore interest payments on the outstanding special term-loan in March 2000 for Punjab, should continue until 2006-07. The government should this time finalise the quantum of debt relief to be allowed in terms of recommendations of the 11th panel.