RBI proposes fund for servicing debt

In order to check the fiscal position of states, the Reserve Bank of India has advised the setting up of a consolidated sinking fund for debt servicing and a constitution of guarantee redemption fund to meet guarantee obligations.

The guarantee redemption fund is meant to sensitise states to the fiscal risk arising out of guarantees extended by them, said Shyamala Gopinath, deputy governor, Reserve Bank of India, at a programme on human development and state finances (jointly organised by the Reserve Bank of India and the UNDP) at the College of Agricultural Banking, Pune.

The Economic Survey, 2004-05 pointed out that the deterioration in the finances of state governments had been sharper than that of the Centre.

All the major fiscal indicators reveal a worsening of the fiscal situation as compared with the position in 1990-91. Fiscal deficit of states as a proportion of GDP increased from 3.3 per cent in 1990-91 to 5.1 per cent in the revised estimates for 2003-04.

Revenue deficit, too, witnessed a sharper rise to 2.6 percent of the GDP as per the revised estimates for 2003-04. The factors responsible are many.

They include factors such as, growing burden of interest payments, pension liabilities, and administrative expenditure, mounting losses of state owned public enterprises, inappropriate user charges, increased contingent liabilities and deceleration in central transfers, said Gopinath, adding such fiscal stress erodes the states' capability to discharge its responsibility for developing infrastructure.

It has increasingly been recognised that it is the state finances where the government sector's interface with the people is the maximum. Hence, fiscal consolidation and progressive implementation of fiscal and institutional reforms by the states will have a direct bearing on the quality of life of people.