States Cold To Market Access Plan

The Reserve Bank of India (RBI) decision to allow state governments to access the market at their own discretion is unlikely to find takers.

According to reliable sources, some states including Karnataka have expressed their preference for continuing with the existing system of market borrowing where states borrowed at a predetermined uniform coupon and maturity.

A senior RBI official indicated that the modalities of the proposed system are yet to be finalised.

Some states are not in favour of being moved to the market because of their relatively poor financial position.

The treasury head of a public sector bank said that given an option, banks would shy away from investing in the paper of some states like Uttar Pradesh and Bihar.

 

In its report on the Finances of state governments : 1997-98, released on Wednesday, RBI had indicated that it would allow state governments to borrow a minimum of five per cent and a maximum of 35 per cent of their allocated borrowings for 1998-99 at market-related interest rates and also within their own time frame.

The quantum of gross market borrowings by the state governments was Rs 7,749 crore in 1997-98.

According to a state government official, this issue was first discussed at the meeting between the state finance secretaries and the apex bank held in November last year.

While a view was expressed that states be given flexibility in their market borrowing from the next financial year no final decision was taken.

None of the non-special category states barring NCT Delhi run a revenue surplus and the efforts of the states in mobilising additional resources to bridge the revenue deficit has been poor. In its report, RBI has also indicated that the revenue deficit in case of Uttar Pradesh, Andhra Pradesh and Tamil Nadu is expected to worsen.

Among the states with a manageable level of revenue deficit and likely candidates for tapping the market include Maharashtra, Gujarat and Rajasthan.

Some of these states have already undertaken steps towards improving their tax collections by opting for the system of value-added tax and are in favour of setting up a consolidated sinking fund.

According to an RBI official, among the states that have evinced interest in setting up a consolidated sinking fund include Rajasthan and among the special category states Sikkim.