The Hindu Business Line : Karnataka among the most indebted States

The State Government's consolidated debt stock is estimated at 37 per cent of the gross state domestic product (GSDP) for the current financial year. The only other southern State that has a high debt stock is Kerala with a ratio of 40 per cent. The estimates are made in the latest medium-term fiscal plan for Karnataka for the year 2007-08.

Consolidated debt stock includes borrowings by the Government and those by State Government-owned public sector undertakings including special purpose vehicles such as the Krishna Bhagya Jala Nigam Ltd and Karnataka Neeravari Nigam Ltd. The figure also includes borrowings made through small savings schemes.

In fact during the last two years, the State Government had taken advantage of the debt swap scheme of the Centre. This scheme, sources said, however did not allow the States to reduce the overall debt stock. It only allowed the States to bring down their high interest liabilities, by substituting high-cost market loans with low-cost small savings borrowings, allowing for a reduction in interest expenditure and therefore revenue expenditure.

In absolute numbers the consolidated debt stock of the State is estimated at Rs 60,869 crore for the current fiscal year. Of this, direct borrowings, which included state development loans and borrowings from the Centre, are estimated at Rs 54,781 crore. These borrowings are technically supported by sovereign guarantees. The guarantees implied assignment of States' share of central transfers in the event of shortfalls in debt service repayment obligations.

Borrowings made by the two SPVs are also provided in the State Government's budget. The stock of debt of the SPVs

in the current fiscal is estimated at Rs 5,118 crore. The State Government support for the two SPVs were in the form of capitalisation and refinancing of the debt service obligations for which provisions are made in the State Budget.

In addition, there are also borrowings by a series of other State Government-owned public sector undertakings including power and water utilities on the strength of guarantees. These are estimated at Rs 1,000 crore. These liabilities though are contingent in nature. This implies that the liabilities would become direct only in the event of the undertakings defaulting in meeting the debt service obligations.

However, the contingent liabilities are unfunded liabilities, the sources said. This was despite the fact that the Reserve Bank of India, has repeatedly recommended to the States for creating of a sinking fund or a debt redemption fund. Consequently, in the event of devolvement the liabilities would become part of non-Plan revenue expenditure.

The figure in the MTFP also masks the pension liabilities of the State Government, estimated this year at Rs 2,500 crore, though likely to overshoot estimates in view of dearness allowance payouts the sources said. Pensions are also unfunded liabilities and this has been building up over the last few years. Though World Bank initiated reforms mandate converting them into funded liabilities States including Karnataka are yet to comply. The Centre and the Bank had recommended a transition from the current pension regime a defined contribution regime.

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