States to face curbs on off-budget borrowing

In a bid to further clamp down on states' off-Budget borrowings, the finance ministry is likely to ask the Reserve Bank of India (RBI) to direct financial institutions such as Hudco, the Industrial Development bank of India (Idbi), Life Insurance Corporation and Power Finance Corporation from insisting on state guarantees for funding economically unviable projects.

According to finance ministry officials, a large portion of state guarantees, estimated at Rs 1,66,116 crore by the end of financial year 2002-03, were given against projects where there was no immediate possibility of servicing the loans from the project cash flows. The liability of interest and principal payments, thus, devolved largely on states themselves.

A study by Crisil last year put conservative estimates of default in the current financial year alone at Rs 4,500 crore.

"Such defaults will, in all probability, impact upon India's sovereign credit rating by international agencies such as Standard and Poor and Moody's," a ministry official said.

The officials pointed out that several states routinely resorted to guarantee-based borrowings by floating special purpose vehicles to meet their revenue needs.

"In one state alone, the quantum of guarantees increased by Rs 10,000 crore in 2000 mainly on account of the co-operative sector," an official said.

While market borrowings and negotiated loans from financial institutions(FIs) by states are subject to the concurrence of the Centre under Article 293 of the Constitution, the ministry admits that between 1995-96 and 2000-01, such permissions were given routinely indicating a softening of the constraint.

In an internal assessment, the ministry has noted that such borrowings were moving to avenues where the constitutional safeguards were unnecessary and could be undermined.

However, in the last three years the ministry has curbed such off-budget borrowings. In 1999-2000, funds raised by states from markets through guaranteed loans stood at Rs 16,800 crore.

In 2000-01, it fell to Rs 12,200 crore. In the next two years, it further dropped to Rs 7,700 crore and Rs 4,200 crore, respectively.