Ministry, Plan panel to discuss state finances

Officials from the finance ministry and Planning Commission will sit down next week to sort out differences on state finances.

After ironing out the differences, a common action plan will be prepared for placing before the National Development Council, expected to meet towards the end of June.

The two bodies have differences over the debt cap for the states, with the Planning Commission seeking higher borrowing limit for the current fiscal, while the finance ministry wants it frozen at the 2004-05 level.

"If individual states have a problem sticking to the previous year's cap, the finance ministry should be flexible," said a Planning Commission official.

Another issue is how to implement the TFC's debt relief package. "Under the present system, there is no debt relief for the most debt-stressed states and those with larger borrowings from the National Small Savings Fund, financial institutions and banks," said an official.

The finance ministry is, however, of the opinion that with a liberal grant component and debt waiver, in line with the Twelfth Finance Commission recommendations, and with surplus funds in the National Small Savings Fund, the states would not be required to borrow from the markets.

"Market rates are hardening. The last issue was at 7.7 per cent, so market borrowings could lose their attractiveness. For now, quite a few states want to continue with the old system (of the centre borrowing on their behalf)," said a Plan panel official.

The Planning Commission has raised the issue that, against the earlier loans at 9 per cent, now states are being asked to take the small savings funds at 9.5 per cent interest.

Finance ministry officials, however, point out that the NSSF funds come with a five-year moratorium and a there is no bullet repayment.

The finance ministry, was contemplating extending the facility of debt consolidation and interest rate reduction only to states which signed memoranda of understanding with the Centre on reducing deficits within a specified timeframe.

These MoUs would on the line of the Fiscal Reform Facility, which the TFC had criticised in its report. It had, instead suggested that states be given the relief in return for enacting fiscal responsibility laws and that implementation of the law be left to them.

On the issue of managing the debt caps and state borrowings, the Planning Commission is in favour of a body like the Loan Council suggested by the TFC.

As a temporary measure, a group of four-five people could get together to assess debt sustainability of states, officials said. Finance ministry officials, however, said that the system was tried in some countries but did not take off.