The Hindu Business Line : ‘State Govt finances better, but concerns remain’

Snapshot
Recommendations of the Sixth Pay Commission likely to impact State finances.
Cash management of State Governments has shown a marked improvement over the years.
States urged to develop a calendar for open market borrowings.

Brain storming: The RBI Governor, Dr Y.V. Reddy, and the Chairman, Economic Advisory Council to the Prime Minister, Dr C. Rangarajan, at the annual day celebrations of Madras School of Economics in Chennai on Sunday.

Our Bureau

Chennai, Sept. 23 The financial position of most State Governments is much better, thanks to the implementation of measures recommended by the 12th Finance Commission.

But States have to watch out against a few challenges such as the impact of the recommendations of the Sixth Pay Commission, according to Dr Y.V. Reddy, Governor of the Reserve Bank of India.

Speaking at the Annual Day celebrations of the Madras School of Economics today, Dr Reddy said that State Governments were not spending enough on education and health, “which remain low at around 2.5 per cent and 0.7 per cent of GDP respectively.”

From the RBI’s standpoint, initiatives relating to credit culture, financial literacy, financial inclusion and priority sector lending would continue to remain high on the policy agenda, he added.

On the improved management of finances by States, the RBI Governor said that all but eight States had projected revenue surpluses for the current year.

The aggregate revenue surplus of all States has been budgeted at 0.4 per cent of the GDP.

Open market borrowings of the State Governments, which used to be at fixed rates on allocation basis a decade ago, are now being conducted entirely through auction route.

States are able to borrow at rates not more than half a percentage point higher than Central Government securities of corresponding maturity, “reflecting favourable market perception.”

Further, guarantees given by State Governments are also on the decline. Guarantees were placed at 6.5 per cent of the GDP as of March 31, 2005 compared with eight per cent at the end of March 2001.

“Many States have imposed administrative or legislative ceilings on guarantees. Eight States have set up guarantee redemption funds to provide for the possible invocation of guarantees.”

Also, cash management of State Governments has shown a marked improvement over the years.

States are making less use of RBI’s short-term lending facility – ways and means advances – compared to previous years.

The Governor also said that on the other hand, there are a few issues of concern.

He mentioned the possible impact of the Sixth Pay Commission as the first among them. “State Governments would need to make their Budgets robust enough to enable them to steadfastly adhere to the provisions of their fiscal responsibility legislations.”

States should develop a calendar for open market borrowings just as the Government of India does.

This would enhance transparency and reduce uncertainty for market participants, thereby helping in smoother market borrowing operations.

Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister and former Governor of the RBI, said that State Governments’ financial position was better partly due to the buoyancy in the revenues of the Central Government (part of which flows to the States). He added that the introduction of VAT raised the revenues of many State Governments.

“Re-issuance of State Government securities would also help build a critical minimum size of securities, which, in turn, would help enhance their liquidity.”

The RBI continues to receive complaints from banks and financial institutions regarding defaults in respect of obligations under State Government-guaranteed bonds, Dr Reddy said.

Such issues need to be addressed by the Governments as they would impact their credibility.

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