The Hindu Business Line : Not only States, Centre will also benefit from rising interest rates

STATES would not be the sole winners from the Finance Ministry's debt-swap scheme. The scheme's ingenious financial engineering ensures huge interest-cost savings for the Centre as well.

The Centre's gains are linked to what it has been doing with the prepayment monies received from the States - manifested as `additional loan recoveries' over and above the normal principal amount repaid by them every year.

The entire prepayment receipts worth Rs 1,00,000 crore that the Centre will get from the States between 2002-03 and 2004-05, will go towards redeeming the 10.5 per cent interest-bearing special securities issued by it in the past to the National Small Savings Fund (NSSF). These non-marketable securities were issued against the Centre's outstanding small savings liabilities of Rs 1,76,221 crore, incurred prior to the Fund's establishment in April 1, 1999.

But the story does not end there. The redemption sums accruing to the NSSF are being re-invested in fresh special securities issued by the Centre, at rates way below the original 10.5 per cent. The first instalment of redemption monies worth Rs 13,766 crore were re-invested by NSSF on March 28, 2003 in special securities issued by the Centre, at 7 per cent. The second and third instalments of Rs 32,602 crore and Rs 13,609 crore were similarly on September 30, 2003 and March 31, 2004, re-invested in securities bearing even lower coupons of 6 per cent and 5.95 per cent, respectively.

Simply put, the debt-swap scheme would not only help States to replace high-cost Central loans with cheaper additional market borrowings and small savings proceeds, but also enable the Centre to swap an equivalent amount of 10.5 per cent special securities issued to the NSSF with fresh stock bearing around 6.5 per cent interest. The Centre's annual interest savings from this `double swap' arrangement, thus, works out to about Rs 4,000 crore on a total redemption amount of Rs 1,00,000 crore.

All this, of course, comes at the expense of the NSSF.

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