Rbi Calls Meet On Contingent Liabilities Of States

The Reserve Bank of India has called for a meeting of state finance secretaries on November 16 to work out an acceptable limit on contingent liabilities.

This meeting is significant since the states have been borrowing aggressively in the financial markets through special purpose vehicles, state industrial development corporations, electricity boards and state finance corporations.

The debts are raised in the form of direct bond issues guaranteed by state governments or in the form of fixed deposits.

In addition, state governments have been providing cash flow guarantees to power projects and guaranteeing project debts. According to the RBI, 17 states have an outstanding guarantee of Rs 65,573 crore.

There is a constitutional limit on state government guarantees. Article 293 (1) of the Constitution prescribes a guarantee limit equivalent to the consolidated fund of the respective state.

However, several states stand to breach this limit if they extend cash flow and debt guarantees for a series of projects.

The more cautious states have worked out their own methods of freezing guarantees. Gujarat has frozen guarantees at Rs 8,000 crore, equivalent to the revenue of the state. Gujarat has also suspended giving escrow support for some of the state power projects. Some of the power projects coming up in the state are unlikely to obtain any guarantees from the state government for either cash flows or for project debts.

Goa has frozen guarantees at Rs 400 crore, equivalent to its internal revenue, which is in line with privatisation efforts for some of its urban infrastructure projects.

For other states, no formal limits have been placed. The World Bank has advised the Andhra Pradesh government to restrict its guarantees at 9 per cent of its net state domestic product. The Andhra Pradesh State Electricity Board, Andhra Pradesh State Road Development Corporation and Andhra Pradesh Water Resources Development Corporation have been aggressive borrowers in the financial markets.