Finance panel makes a case for regulating state borrowings

The Twelfth Finance Commission has pitched for an autonomous regulatory body to regulate state borrowings.

To be named Loan Council, the body will ensure that borrowings by states are consistent with their sustainability requirements, to be determined by state-specific parameters.

Reforms on state finances are to be undertaken at the initiative of state governments.

However, a report of the commission said: "The commission has also emphasised the need for imposing a hard Budget constraint and suggested that the overall borrowing programme of a state should be within a prescribed limit, determined annually, taking into account borrowings from all sources."

Debt sustainability conditions are to be defined in terms of interest payments to revenue receipts. A ratio of 15 per cent by 2009-10 is achievable, feels the commission.

In cases where the existing interest payments were large relative to revenue receipts and the correction required in the initial years was too large, some adjustments had to be provided for, the commission said.

West Bengal, Punjab, Orissa, Rajasthan, Uttar Pradesh, Kerala and Bihar are among the general category states that will require longer adjustment periods to meet their targets. Among the special category states with a higher-than-average ratio of interest payment to revenue receipts are Himachal Pradesh, Uttaranchal, Manipur and Assam.

In the adjustment phase (2005-09), the fiscal deficit levels should be such that the debt-GDP ratio falls continuously. In the stabilisation phase, the fiscal deficit should be such as to ensure that the debt-GDP ratio remains stable, the commission recommended.

The suggested year-wise states' fiscal deficit-GDP targets consistent with the restructuring programme is 4.13 per cent for 2005-06, 3.75 per cent for 2006-07, 3.38 per cent for 2007-08 and 3 per cent for 2008-10.

The Loan Council will also be expected to ensure that the overall borrowings programme of states, considered together, remains consistent with the requirements of macro-economic stability and the fiscal deficit targets of all states.

This can be ensured by relating the average annual borrowing requirement for all states with that of the individual state.

It has also been suggested that the Centre do away with on-lending to states except where it can be managed through a public account and facilitate their accessing the market directly for their borrowing requirements.

The commission has suggested targeting overall fiscal deficit as a percentage of gross domestic product (GDP) at 3 per cent by 2009-10. States should enact their fiscal responsibility laws, bringing down their revenue deficits to zero and fiscal deficits to sustainable levels by 2008-09.