States Get More Mkt Borrowing Leeway
The Reserve Bank of India (RBI) has decided to allow state governments to borrow a minimum of 5 per cent and a maximum of 35 per cent of their allocated borrowings for 1998-99 at market related interest rates...within their own time-frame.
This has been indicated by the RBIs annual report on The Finances of State Governments: 1997-98. However, the RBI has not spelt out the method that will be adopted by the states. The RBI is expected to allow states to determine the maturity and timing of their borrowings.
The RBIs decision follows demands for a review of the existing mechanism of market borrowing by states at a predetermined, uniform coupon rate, and maturity in specified tranches.
The issue was discussed at the meeting between state finance secretaries and the RBI on November 8, 1997. The meeting decided that states would be allowed flexibility in their market borrowings from the next fiscal.
Gross market borrowings by state governments have risen from Rs 333 crore in 1980-81 to Rs 2,569 crore by 1990-91 and Rs 7,749 crore in 1997-98. Six states Andhra Pradesh, Bihar, Maharashtra, Uttar Pradesh, West Bengal and Tamil Nadu account for over 50 per cent of the total market borrowings. The proposed format is expected to provide market-driven incentives to states to improve their finances.
The report indicates a slippage in the fiscal position of the states, with the revised revenue deficit estimates for 1996-97 being Rs 15,855 crore against the budget estimate of Rs 11,632 crore. The revised estimate of gross fiscal deficit is Rs 41,845 crore against the budget estimate of Rs 38,745 crore. Consequently, the gross fiscal deficit as a percentage of GDP is higher at 3.31.
The budget estimates put the revenue deficit for the present fiscal at Rs 15,373 crore and the gross fiscal deficit at Rs 45,530 crore, or 3.14 per cent of GDP.
Given that states have not exhibited much fiscal discipline in the past, the possibility of a slippage in these targets during the current year cannot be ruled out.
The RBI has indicated that unless states make concerted efforts to raise additional revenues for meeting the increased burden in their wage bill on account of the acceptance of the report of fifth pay commission, their finances would come under severe stress, particularly in the financing of investment expenditure.
In the view of the central bank, the additional resources made available to the states out of the proceeds of the voluntary disclosure of income scheme (VDIS) would provide some temporary relief to the resource strapped state governments. The state governments should utilise this amount towards infrastructural development which would accelerate the pace of economic growth, the report suggests.
Stating that the elimination of the revenue deficit should be the objective of the states fiscal policy, the RBI has suggested that states should undertake measures to widen and rationalise the tax base and structure to augment tax revenues and explore the scope for implementation of the value added tax system. Since revenues from stamp and registration fees are not commensurate with the rise in property prices, the RBI has suggested rationalisation of stamp and registration fees.
The RBI has also suggested the rationalisation of user charges in power, transport, and irrigation, among others.