The Hindu Business Line : To meet increased revenue expenses — States may borrow more from small savings window

Support for State plans effective from the next fiscal year onwards is expected to be entirely in the form of grant-in-aid, in line with the recommendations of Twelfth Finance Commission (TFC), estimated at Rs 46,204.54 crore for meeting the requirements of the Plan outlay of Rs 75,207.76 crore.

The remaining amount would have to be raised by way of borrowings estimated at Rs 29,003.22 crore. This amount earmarked for States market loans, mostly in the form of sovereign guaranteed state development loans, was considerably lower than what was raised during this fiscal so far — Rs 35,247 crore.

The States had reduced their recourse to small savings during the early part of this decade in view of the high interest rates. But, last year, they tapped the small savings window for swapping their high-cost borrowings from the Centre. This financial year, they have raised close to Rs 17,500 crore through small savings for the debt swap scheme.

For the next year, States' requirement of funds from the small savings window was likely to escalate, sources said, because they would need additional borrowings to meet their expenditure. Most of them are expected to suffer severe revenue compression, on account of the switch-over to the value added tax regime.

Accordingly the sources said some of the revenue expenditure, which included certain components of welfare expenditure and pensions, would have to be met through borrowings. The only window available for raising such borrowings on easy terms is small savings. Resort to market loans is regulated by the Reserve Bank of India.

Moreover, some States would also have to meet guarantee obligations on the borrowings made by their special purpose vehicles and public sector enterprises. Funds through the small savings currently cost about 9 per cent, inclusive of administrative expenses. These rates are currently are at least 200-250 basis points higher than the State development loans, where there is an underlying sovereign guarantee.

As a result, the sources said, interest expenditure for States was likely to balloon over a five-year period, since borrowings from the small savings window was mostly on a cumulative basis. This would mean that State Governments would face bullet redemptions at the end of five years, when the borrowings mature.

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