Sovereign guarantees close to prudential ceiling

Government committed or approved guarantees for loans worth Rs 41,253.5 crore till February 15

The government has been stretching itself to the limit to guarantee various kinds of loans. It was close to the maximum limit of 0.5 per cent of gross domestic product (GDP), as set out in the fiscal consolidation law, towards the end of 2011-12.

Till February 15, the government committed or approved guarantees for loans worth Rs 41,253 crore, which constituted 0.46 per cent of the estimated GDP for 2011-12. However, some of it would be netted as part of the loans coming for redemption.

For 2011-12, the government guaranteed Rs 13,427 crore of loans, 0.18 per cent of GDP. Most guarantees were for India’s agreements with international financial institutions, foreign lending agencies, foreign governments, contractors and consultants, etc, towards repayment of various kinds of loan.

The government gave guarantees on loans that constituted 0.37 per cent of GDP in 2009-10, 0.14 per cent in 2008-09 and 0.16 per cent in 2007-08. It does not give guarantee on tax-free bonds for infrastructure projects. It has doubled the amount to be raised through such bonds to Rs 60,000 crore for 2012-13. These are raised on ratings of companies concerned.

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, and the Rules made thereunder a prescribed limit of 0.5 per cent of GDP for guarantees to be given in any financial year, beginning with 2004-05. If the limit is exceeded owing to unforeseen circumstances, the finance minister is required to make a statement in both Houses of Parliament explaining the deviation, including whether the deviation is substantial and relates to the actual or the potential budgetary outcomes and the remedial measures that the Central government proposes to take in the matter.

Economists say the limit should be adhered to. But if it is crossed by a few percentage points, it should not be a major cause of concern, as the government can set another limit by amending the law.

Also, guarantees invoked in actual are not too large. For example, only Rs 18 crore of guarantees were invoked in 2010-11 and nothing in the previous financial year.

CARE Ratings’ chief economist, Madan Sabnavis, said much bigger issues were adhering to fiscal deficit and revenue deficit targets.

After the targets set by the FRBM Act, 2003, expired in 2008-09, the government came out with another road map from this financial year.

According to the new road map, the fiscal deficit should be contained to 5.1 per cent of GDP in 2012-13 and 4.5 per cent in 2013-14 and 3.9 per cent in 2014-15. Similarly, revenue deficit should come down to 3.4 per cent this year and to 2.8 and two per cent in 2013-14 and 2014-15, respectively. Since the target set by the 13th Finance Commission for eliminating the revenue deficit by 2014-15 does not seem to be happening and the finance ministry believes it is not prudent to eliminate revenue deficit completely, as a part also goes for asset generation programmes of states, the government came out with a new idea of effective revenue deficit.

Effective revenue deficit is revenue deficit sans funds given to states for asset generation. Now, the new road map calls for limiting effective revenue deficit to 1.8 per cent this financial year, one per cent in 2013-14, and completely eliminating it by 2014-15.