Crisis Brewing As States Near Cap On Govt Guarantees

Several state governments are no longer in a position to extend guarantees to upcoming infrastructure projects as they have almost reached the ceiling on such guarantees, imposed by Article 293 (1) of the Constitution.

The states which are close to the ceiling include Rajasthan, Gujarat and Karnataka. In Uttar Pradesh, the state government has expressed its inability to pay a small amount of Rs 380 crore invoked by financial institutions, which virtually forced a reschedulment of the overdue loans.

This precarious situation has sparked off fears of a financial crisis in the states. This method of assuming contingent liabilities (through government guarantees) could lead to an explosive internal debt situation in the states, said a banking source.

Under Article 293 (1), state governments are expected to provide guarantees only up to the extent of their consolidated fund. This includes fund inflows into the states both under the capital account mainly borrowings from the markets, from the Centre, from FIs and grants from the Centre and the revenue account, consisting of tax receipts, share in Central taxes and dividend/profit receipts.

A rough calculation shows that state electricity boards, on average, are required to pay independent power producers a little over Rs 1,000 crore for a 1,000 megawatt plant. This payment is guaranteed by the state government.

Extension of such guarantees has put several state governments in a precarious position. For example, power purchase agreements for approximately 1,100 mw have been signed in Rajasthan, which means that the state government has to guarantee around Rs 1,100 crore on the PPAs alone. But the states consolidated fund amounts to barely about Rs 2,000 crore.

Meanwhile, states like Gujarat, Maharashtra and Karnataka have also started raising funds for mega projects like the Sardar Sarovar dam, based on a debt-equity ratio of around 2:1.

The cost of such projects varies between Rs 6,000 crore and Rs 14,000 crore, which by itself equals the respective states consolidated funds. As a result, Gujarat has stopped extending guarantees to IPPs.

State finance ministers are expected to head expenditure prioritisation committees, which, in turn, decide payments to creditors. In reality, none of the states have such working committees monitoring the contingency fund, says an Icra official.