Says sustained high level of balances isn’t ‘fiscally prudent’
The finance ministry has suggested that states, which have continued to have high level of cash balances parked in treasury bills (T-Bills), initiate steps to lower these, as these are “fiscally not very prudent”.
The issue is expected to be the primary agenda at the annual conference of finance secretaries of state and union territories on Monday.
In the agenda note for the meeting, the finance ministry has recommended that states reduce their cash balances over time to avoid financial loss on account of negative returns. Moreover, it has said it is essential for states to include cash balances in financing their fiscal deficits and reduce their borrowing from the market.
“This is fiscally not very prudent because states get a relatively low return on these investments, compared to their cost of borrowing. Thus, states earn a negative return on these cash balances,” the finance ministry has said. It has further said that the Centre, which pays interest to states on these cash balances, cannot take these investments into consideration for the overall cash management due to their “transient” nature.
The main cause, according to the ministry, for these levels of cash balances is that states undertake borrowing without taking into account their cash balances, and such excess borrowings are usually more than their fiscal deficit. This results in cash carryover to the next year.
States started having a cash surplus after the award of the Twelfth Finance Commission, along with improved economic growth and higher tax collections, due to the introduction of state value-added tax. Most states have had cash surplus for nearly five years now.
The investment of states in T-Bills had risen 107 per cent to Rs 1,07,379 crore in the period from 2005-06 to 2009-10. As on October 1, the investment of states in T-Bills stood at Rs 91,030.84 crore, data compiled by the finance ministry showed.
The finance ministry’s concern comes at a time when fiscal consolidation tops the Centre’s macroeconomic agenda. The finance ministry has, in the agenda note, pointed out that there has been a steady and substantial investment of states in T-Bills, contrary to the optimum requirement.
To enable the states to properly manage their cash requirements, the Reserve Bank of India (RBI) provides for facilities like Ways and Means Advance (WMA) Overdraft (OD) and investment in T-Bills. When a state has a cash surplus over and above the minimum balance, RBI automatically invests the surplus in 14-day T-Bills; and, on specific instructions from a state, in 91-,182- and 364-day T-Bills, too.
The excess investment of states in T-Bills has also been pointed out by the Thirteenth Finance Commission, which said: “With reduced fiscal deficits, it is essential that states follow the practice of borrowing on requirement rather than on availability… and use cash balances to estimate gross borrowing limits.”
