The Centre is likely to cap "off-budget" borrowings of states in an attempt to curb their extravagant fund-raising programmes. Off-budget borrowings are guarantees given by states to the debt programmes of their public sector units.
They are not in the purview of Article 293 under which the Centre can restrict a state's borrowing.
The total off-budget borrowings of the states at the end of the last financial year stood at Rs 1,20,000 crore, almost 6 per cent of the gross domestic product.
States have increasingly adopted guarantees to raise resources because of the squeeze in non-debt receipts.
Officials told Business Standard the cap was being planned to restrict the overall debt of states, including their contingent liabilities.
Further, to ensure prudent off-budget borrowings, financial institutions might be asked to accept state guarantees only after establishing the viability of projects.
The move is in line with recommendations of the working group on states' resources for the Tenth Five-Year Plan.
The group felt state guarantees were weak in that they bypassed, or at best made only a cursory reference to, project evaluation.
Further, easy access to such funds prompts states to float umbrella PSUs to raise money through guarantees.
The working group further said budgetary support to state-level public enterprises and grants-in-aids to local institutions should be earmarked to fiscal reforms.
It said privatisation of state-level public enterprises, particularly state electricity boards, should be preceded by downsizing and an undertaking that their debts would not be passed on to the prospective investor.
The group, which prepared the report in January 2002, also said the Centre must harden its fiscal stance to ensure that states adhere to their sustainability-determined borrowing targets.
"The Centre is in a strong position to limit the net borrowings of states," it points out. This will also wean states away from seeking ways-and-means advances from the Centre to tide over temporary resource crunches.
