29 states have swapped Rs 60368 crore debt

Twenty-nine states have swapped Rs 60,368 crore worth of high-cost debt for cheaper loans in the past two years, with 61 per cent of it done through market borrowings, the Reserve Bank of India's report on state finances released today said.

Market borrowings under the debt swap scheme had helped cut states' interest costs by more than half since April 2002, to below 6.5 per cent, it said.

The Centre has allowed states to take advantage of lower interest rates by swapping high-cost past loans for cheaper funds raised either from the market or the proceeds of a national small savings fund.

Under the scheme, states have been allowed to retire up to Rs 1,00,000 crore worth of central loans carrying interest rates of more than 13 per cent, the RBI report said.

Apart from market borrowings, the loans retired so far had also been financed through the issue of special securities to the National Small Savings Fund (NSSF) at 9.5 percent "" less than three-fourths the earlier cost, the central bank said.

Rising interest payments had been a significant contributor to a sharp deterioration in states' finances in the 1990s, which along with increased spending on salaries and pensions pushed up their gross fiscal deficit.

The combined fiscal deficit of the states and the federal government is currently about 10 percent of gross domestic product (GDP), one of the largest in the world.