The Hindu Business Line : Rangarajan moots Loan Council to keep tabs on States' borrowings

THE Twelfth Finance Commission has suggested incorporation of an independent Loan Council to supervise the overall limits of annual borrowings of State Governments from all sources.

This was stated by the Prime Minister's Economic Advisory Council Chairman, Dr C. Rangarajan, at a conference on `Fiscal Responsibility and Intergovernmental Finance' held at the Administrative Staff College of India (ASCI) here today.

The Loan Council should have representatives from the Ministry of Finance, Planning Commission, Reserve Bank of India, and the state governments. This Council may, at the beginning of each year, announce the borrowing limits of each State, taking into account the sustainability considerations. The Commission has recommended that states, like the Centre, must decide their annual borrowing programme, within the framework of their respective fiscal responsibility legislations.

Further, Dr Rangarajan said, "Our suggestion for de-linking grants and loans in plan assistance, as these need to be determined by different principles, is part of the reform of the borrowing regime."

The Twelfth Finance Commission acknowledged that the debt burden of states was currently heavy and there were also grounds to believe that the margins that the Central Government charged on its lending to the states were unduly high in the past. Accordingly, the Commission has recommended a scheme of debt relief that consisted of two parts. One, the relief that comes from consolidating the past debt and rescheduling it along with interest rate reduction. The second part consists of debt write-off, which is linked to the reduction in the absolute level of revenue deficit.

According to Dr Rangarajan, in terms of the recommendations relating to consolidation, re-schedulement and lowering of rate, the debt relief during the award period for all the states put together worked out to Rs 21, 276 crore in interest payment and Rs 11,929 crore in repayment. "The only condition imposed for getting this relief is of passing an appropriate fiscal responsibility legislation. No other condition is attached. On the other hand, debt write-off has more stringent conditions attached."

Justifying the timing of fiscal reforms, the Chief Economic Advisor in the Union Finance Ministry, Dr Ashok Lahiri, said the best time to fix the roof is not when it is raining, but when the sun is shining bright. "The time for fiscal reforms is now, when the economy is in a buoyant and resilient mode."

Dr Lahiri stressed the need for harmonising the policies of the Centre and states. In a federal structure, growth, inflation and performance of the economy depend on the combined operation of all levels of Government.

"Prudence on the part of one level of Government can be neutralised or more than reversed by imprudence on the part of another."

Stating that corporate income-tax collections grew by 38 per cent and 31 per cent in 2003-04 and 2004-05, respectively, Dr Lahiri said,

"We expect that at long last, in a couple of years' time, we shall achieve the desired objective of Centre's direct tax revenues exceeding those from indirect taxes."

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