Inter-ministerial group to look into debt cap for states

The government is likely to constitute an inter-ministerial group to settle the issue of debt cap for state governments. The group will have officials from the ministry of finance, the Reserve Bank of India and the Planning Commission.

The decision is a fallout of the differences on the issue between the finance ministry and the Planning Commission.

"The finance ministry is not in favour of setting up a loan council suggested by the Twelfth Finance Commission. A committee is, therefore, likely to be set up and a report will be given by September or October this year, well in time for the budgetary exercise of 2006-07," said a Planning Commission official.

The finance ministry wanted the debt cap for states be frozen at the 2004-05 level, while the Planning Commission was in favour of higher debt caps. But, the finance ministry is now saying that at least in some states, debt caps can be raised above the 2004-05 level.

In 2005-06, states will first have to borrow from the National Small Savings Fund (NSSF). Any additional fund requirement will have to be through borrowings from the market.

But states that are in a position to raise money from the market will be allowed to use NSSF money to repay high-cost debts to banks and financial institutions. The Centre will use its influence with financial institutions and banks to permit prepayment of loans.

This was decided at a meeting yesterday between Planning Commission Deputy Chairman Montek Singh Ahluwalia and Finance Minister P Chidambaram.

"Since the NSSF funds will be available at an interest rate of 9.5 per cent, against market loans available at 7-8 per cent, states that are in a position to raise money from the markets will be allowed to use the NSSF money to prepay high-cost debts to banks and financial institutions. States, which will not be able to raise market funds, will, however, have to borrow from the NSSF," said an official.

The finance ministry has argued that NSSF is a secure source of funds for states. It has the added advantage that offtake from it will not raise market interest rates.

"The matter will be discussed at the national development council meeting to he held later this month," said Abhijit Sen, a member of the Planning Commission.

The finance commission had recommended that central loans be done away with and states be allowed to raise funds from the market. However, there had been no clarity on what states will do for the first two-and-a-half months of the fiscal.

"The finance commission reward ""higher share of the divisible tax pool and more grants ""means that the ways-and-means situation of states is good at the moment. So, most states are financially alright, though Plan financing has been delayed," Sen added.