The Hindu Business Line : Karnataka to terminate World Bank loans

Instead, official sources said here, the State Government has sought an alternative borrowing amounting to Rs 3,500 crore. This borrowing was intended for meeting the fiscal reform costs. The officials said the resources had been sought as a one-time relaxation in the market-borrowing limit or directly from the Centre. Relaxation in the market borrowing would imply allowing a larger market borrowing over and above the current limits.

Karnataka has so far drawn $325 million in two tranches of the proposed amount of Rs 12,500 crore. The third tranche of $200 million was withheld since the State had failed to meet some of the reform milestones prescribed by the bank.

The sources said the major factors that had prompted Karnataka to take this step were the high costs of borrowing. At present, the bank's funds released by the Centre comprised a loan component of 70 per cent and another 30 per cent by way of grants. The interest rate charged on the loan component is close to about 7 per cent. The main advantage with multilateral loans was the long maturities of 25 years.

On the other hand, market borrowings for States were available at less than 6 per cent, though only for 10 years. However, the sources said, the Centre was in a position to permit even longer duration borrowings. The last round of 10-year State loans were raised by the States at rates as low as 5.65 per cent, the lowest since the 1960s. "For cutting back on revenue expenditure, domestic borrowings are definitely more attractive," the sources said.

Besides, the sources said, the actual cost of borrowing from multilateral institutions was likely to escalate. But the Centre has now proposed that all States with borrowings from multilateral institutions create a fund for exchange rate fluctuation to charge out of the respective consolidated funds. At present, all the exchange risks on multilateral loans to the States are absorbed directly by the Centre.

In addition, there were also covert costs in the form of rigid conditionalities prescribing reduction in revenue expenditure — subsidies. Such conditions risked destabilising the economies in the States, the sources said. In Karnataka, the application of subsidy reductions had led to steep increase in power tariffs, by over 40 per cent since the beginning of reforms.

Given these high costs, the Ministry of Finance has been advising all States to substitute non-project multilateral loans with low cost funds from the domestic financial institutions. Among the States that have availed themselves of such economic restructuring loans from multilateral institutions, include Gujarat, Madhya Pradesh, Kerala, Andhra Pradesh and Haryana. Only Haryana has, so far, terminated the loan.

For the Centre such a reduction of multilateral funding has a positive impact on the fiscal estimates. All multilateral funding is currently routed through the Ministry of Finance. As a result, such loans are treated as part of the Centre's debt, and, therefore, have a direct impact on its fiscal estimates.