Kerala Finance Minister Thomas Issac on Wednesday urged the Centre to allow states to launch 'pandemic bonds' having an interest rate under 5 per cent.
The proposal comes against the backdrop of states looking to raise money to fund measures to deal with the coronavirus pandemic, which has resulted in more than 5,600 cases of infections across the country. Besides, the 21-day nationwide lockdown to curb spreading of the infection has caused economic disruptions.
On Tuesday, Kerala had to offer an interest rate of 8.96 percent for Rs 6,000 crore market borrowing or state development loan for a 15-year period.
"Chief Minister (Pinarai Vijayan) is writing to the Prime Minster seeking his intervention in allowing the states to launch pandemic bonds at a fixed interest rate of lower than 5 per cent. The Centre should also ask the Reserve Bank to buy these bonds and (those borrowings) should be kept off the balance-sheet of the states," Issac said in a Facebook post.
The pandemic bond would effectively work like monetisation of fiscal deficit -- which means the central bank prints more money to pay for government debt by buying up government bonds and booking the same on its balance-sheet.
The minister said Rs 6,000 crore borrowed from the market on Tuesday is the Kerala's share in the first tranche of the Rs 1.27 lakh crore market borrowing that the Centre allowed for the states in 2020-21.
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Paying 8.96 per cent interest for 15 years on this loan would leave the state in a deep debt trap from which it would be difficult to come out, Issac said.
He also called upon the Centre to monetise the debt by borrowing directly from the Reserve Bank and divide the amount among states.
The finance minister also said that the chief minister would request the Centre to hike the ceiling on states' fiscal deficit to 5 per cent from the present 3 per cent to tide over the deep financial constraints arising from the coronavirus pandemic.