Centre mulls foreign grants for core sector

The government is considering a proposal to use multilateral and bilateral assistance to finance the creation of infrastructure.

The government would pass on the external assistance to the states on a back-to-back basis, that is, on the same terms as the international agencies provide them.

"This would require the Centre to undertake donor coordination and decide which agencies would fund what projects and in which states," said an official.

The proposal would require the Centre to avail of grants and concessional funds only for specific sectors "" social sector projects, disaster mitigation and other non-financially remunerative projects.

Non-concessional assistance could be availed of for infrastructural and other projects that could generate full or substantial financial returns.

The Planning Commission has approved 'in principle' the finance ministry's proposal to delink externally-aided projects from central assistance. "Details, however, have to be worked out," said an official.

The move would substantially bring down the states' interest burden. They would, however, be subject to foreign exchange risk, wherein repayment of loans, in rupee terms, could go up if the exchange rate worsened.

Since the repayment period in the case of international loans is not less than 20 years, the states would benefit by way of a longer repayment period. Also, these loans have relatively low interest rates.

While no projections of rupee depreciation are possible, the risk for states is not likely to be substantial. States should be able to have an effective interest rate of between 5""7 per cent, with the depreciation of the rupee, said officials.

Two proposals have been mooted to tackle the risk. Either the states agree to bear the risk by putting their interest rate savings in a special fund, or the Centre provides the forex depreciation cover to the states by charging a percentage of the loan amount to create a fund to pay for the difference between the principal as per original terms and the principal as per prevailing rates.

The additional central assistance for externally-aided projects is budgeted at Rs 7,000 crore in 2004-05, but is likely to be close to Rs 10,000 crore.

As per the proposal, the Centre will pass on the 100 per cent grants and loans as such and not as 70 per cent loan and 30 per cent grant, as is being done currently. Special category states would, however, continue to receive funds as 90 per cent grants and 10 per cent loans.