The Hindu Business Line : Some States unhappy with TFC's suggestion on market borrowing

THE Twelfth Finance Commission's (TFC) recommendation that the Centre should not act as an intermediary in the borrowing programme of the States has come in for qualified reservation at the meeting of the National Development Council here

A number of States, including Rajasthan and Uttar Pradesh, voiced some apprehension over the issue of being asked to rely on the market rather than the Centre for their borrowings.

Uttar Pradesh even said that the absence of the loan component on the Central assistance might affect the plan performance in a big way.

A major recommendation of the TFC, which has been accepted by the Union Cabinet, related to the stipulation that any transfer from the Centre to the States would, henceforth (including the Plan assistance), not take the form of loans.

This was against the hitherto existing arrangement, where 70 per cent of the Plan assistance was given as loans and 30 per cent as grants, with the grant portion being 90 per cent for special category States.

While recommending the doing away of the loan component of the Central assistance, the TFC had asked the States to mobilise the same amount directly from the market.

"The recommendation of the TFC to shift towards market borrowings rather than dependence on Central loans is appreciated. However, market borrowings have their own limitation. The increased borrowings by States are likely to increase the interest rates. This has actually happened," the Rajasthan Chief Minister, Ms Vasundhara Raje, said.

She added that the repayment of market borrowings would cause problems in the long-term, as huge repayment would be required to be made in the coming years and at that time, the economy may not be able to bear the quantum of market borrowings required to be raised then.

"We suggest that an appropriate mix of various forms of borrowings, including institutional borrowings, should also be worked out," Ms Raje said.

Rajasthan also sought a review in the interest rates on small savings loans, given the present structure of interest rates prevailing in the market.

The Uttar Pradesh Chief Minister, Mr Mulayam Singh Yadav, said that the State was trying to raise the loan component of the Central assistance from the market.

"In case, we fail to do so in full, the Central Government must come to our rescue in fulfilling the shortfall," he said.

The Tamil Nadu Chief Minister, Ms J. Jayalalithaa, said that the TFC has pegged back the borrowing capability of States.

She added that the process of regulating the fiscal deficit of the State had become arbitrary and irrational.

"If a State can move faster with a high growth rate, it should be allowed a higher level of debt," she said.

Ms Jayalalithaa said that she was surprised that this year, there was no clarity on the usual loan component of the Central assistance.

"I insist that the loan component of whatever was indicated as Central assistance should be allowed to be raised at least from the market by a State. The indication that this can be subsumed within some arbitrary borrowing limit is unacceptable. I strongly urge an early resolution of this issue," she said.

The Tamil Nadu Chief Minister also highlighted that the TFC had already extended substantial amounts as grants to certain States that had not done well.

"The same exercise is again being undertaken under different heads by the Union Planning Commission and the Central Government. This can engender a feeling of alienation and denial, leading to tension and acrimony," she said.

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