Plan panel to discuss state debt write-off

The Planning Commission will discuss a set of proposals, including the write-off of state debt, reducing interest rate on loans to states or a combination of the two, along with an increase in the repayment period allowed to states.

The discussion is part of the debate on financial resources in mid-term appraisal for the Tenth Five Year Plan.

The Plan body has also proposed these alternatives to the Finance Commission to tackle state debt.

"Writing off is an option. States are debt-stressed. The percentage of debt repayment and interest payments are quite large.

The matter is, however, technically an issue before the Twelfth Finance Commission. No recommendations have been made by the Planning Commission," Planning Commission Deputy Chairman Montek Singh Ahluwalia had said on the sidelines of a seminar. One option under consideration is a one-time write-off and a stop to extending loans in the future. The Centre would only give grants to the states tied to the fulfilment of certain conditions.

The move will clean up the balancesheets of the states and also allow them to borrow directly from the market. States are, however, likely to oppose the move as loans give them greater freedom. In the long-run, however, such a move would reduce the combined outstanding liability of the Centre and state government to a greater extent, compared to a simple reduction of interest rates.

The saving of Rs 32,000 crore on account of interest outgo would affect their annual revenue expenditure.

Also, the amortisation of central loans of Rs 13,000 crore is proposed to be done away with. This would translate into a benefit of Rs 45,000 crore.

However, a stoppage of central loans would reduce receivables by Rs 30,000 crore, indicating that the states would have a net benefit of Rs 15,000 crore. The Centre, on the other hand, would show a net loss of the same amount, which would push up the fiscal deficit by 0.5 per cent only, and the revenue deficit by 1 per cent of the gross domestic product.

Reducing interest rates on accumulated state debt would be another option discussed. A proposal to reduce the rate to 6 per cent, which would increase revenue deficit of the centre by Rs 7,000 crore and fiscal deficit by Rs 14,000 crorewill be discussed.

The write-off option would make an impact of Rs 19,500 crore on revenue and fiscal deficits taken together.

The drawback of an interest reduction would be such that the Centre would have to bear the servicing cost for the loans.

The Centre borrows to give loans and grants to states. The higher interest cost on the loan component is meant to cover the cost of borrowing the grant component as well. If the interest rate on state debt is lowered, the Centre would have to bear the cost of borrowing, pushing up its deficit level.