The Hindu Business Line : RBI concern over mounting deficits

THE Reserve Bank of India has expressed concern over State Governments' growing deficits calling for steps such as improving the tax-collection system and charging for public services to augment revenues.

In its latest report on `State finances - A study of budgets of 2002-03', the apex bank has said that State Governments are looking at improving their fiscal positions in the medium term.

The report further refers to a Tenth Plan (2002-2007) which states that, "The only way of States to relieve fiscal pressures is to increase all-round tax and non-tax resource mobilisation efforts, coupled with downsizing of staff and administrative expenditure and taking up fiscal reforms to restructure finances and put them on a sustainable basis."

The central bank also cautioned banks and financial institutions to not `bank' only on State Government guarantees while backing a project. "The lending decision should be based on the intrinsic viability and bankability of the project and not solely on the availability of the State Government guarantee," the report said.

State Government guarantees have been an area of concern and the RBI feels the need to have a system to oversee them. "A crucial requirement is to put in place appropriate mechanism to have comprehensive information on guarantees issued by the State Governments.

At the same time, the States would need to make efforts to broadly identify the corresponding risk under guarantees so as to facilitate appropriate budgetary provision for meeting any obligations arising from invocation of guarantees by lending institutions," the report said.

The power sector is another area that is crucial in view of its fiscal implications on the State's financial position considering the large amount of equity support and loans provided by the States.

"The average rate of return on capital invested in State electricity boards (SEBs) that account for the bulk of the States' investments in PSUs has been persistently negative," the report states. The RBI has suggested that appropriate user charges for the service provided by Government agencies should be given priority.

Pension payments, which have shown a sharp rise, are expected to increase emerging as an important expenditure item for the States, the apex bank observed.

"Considering the enormity of the financial burden on the States, reforms of the existing pension schemes assume critical importance," the report said.

The rising interest burden of States has put considerable constraints on developmental activities. "The effective cost of borrowings for the States on their past debt is much higher than the rate at which they are able to raise resources at present from the market. In this context, the recent initiatives for restructuring their high cost loans would facilitate reduction in interest burden of State Governments," the report states.

The declining share of developmental expenditure indicates deterioration in the quality of expenditure. The States would therefore, need to make concerted efforts to augment their revenue receipts so as to ensure adequate funds for developmental activities, the report said. The proposed introduction of a State-level VAT with effect from April 1, 2002 therefore assumes critical importance.

At the end of March 2002, the combined outstanding debt of State Governments amounted to Rs 5,89,218 crore. The debt-GDP ratio of States is estimated to increase further to 26.7 per cent by end of March 2003.

However, the share of loans from the Centre in the total debt declined from 45.1 per cent to 40.6 per cent.

The share of market borrowings has remained at around 17 per cent.

States are now relying increasingly on borrowings from financial institutions.

The share of loans from financial institutions has increased to 7.7 per cent in 2001-02 from 4.8 per cent in 1999-2000, the report stated.

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