Modi’s government is sounding the alarm on off-budget state loans, wants them to be clear

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New Delhi: The Narendra Modi government has expressed concern that state governments are obtaining loans by mortgaging state assets such as municipal parks, collector’s office, taluk’s office, courts and hospitals, learned ThePrint.

According to the central government, if such loans are secured, they should be clearly disclosed to it as part of the states’ Net Borrowing Limit (NBC) as prescribed by the Center at the start of the current fiscal year.

Dissatisfaction with the practice was expressed in a presentation by Finance Secretary TV Somanathan at the national conclave of chief secretaries of all states in Dharamsala last month. The three-day meeting was also attended by Prime Minister Narendra Modi.

The Ministry of Finance has been stressing since March how such off-budget borrowing has the effect of circumventing the NBC that the Center has mandated to states in any given year. For 2022-2023, the central government has set a borrowing ceiling of Rs 8.57 lakh crore or 3.5% of the states’ gross domestic product.

Off-budget borrowings are borrowings contracted by state-run entities, special purpose entities (SPVs) and equivalent instruments, the principal and interest amounts of which are to be financed from state budgets.

“These borrowings have an impact on the revenue shortfall and the budget deficit and therefore have the effect of exceeding the targets set for fiscal indicators under the State Fiscal Responsibility and Fiscal Management (FRBM) Act” , notes the March report from the spending department.

According to the Finance Secretary’s presentation, five states – Andhra Pradesh, Uttar Pradesh, Punjab, Madhya Pradesh and Himachal Pradesh – raised up to Rs 47,316 crore in the two years ending March 2022 through ‘Escrow of Money’. future income. Escrow means the use of state assets in the custody of a financial institution to secure loans against them.

“Entities that don’t have a revenue stream to repay the loans get loans based on guarantees from the state government,” a senior government official told ThePrint.

ThePrint reached out to senior officials from Uttar Pradesh, Himachal Pradesh and Kerala on mail and telephone, but I have not had an answer. However, a senior Punjab government official, who did not want to be named, said these were legacy issues and the AAP government was looking into them.

Data with the Centre, according to the presentation, shows that Telangana, for example, has outstanding guarantees of Rs 1,35,283 crore, or around 11% of the state’s projected GDP in 2022-23. Telangana is followed by Sikkim, Andhra Pradesh, Uttar Pradesh and Rajasthan. “Some states have significant safeguards outstanding that pose a threat, if invoked,” it was noted.

The Dharamshala meeting between the Center and the States also raised issues such as the state electricity distribution companies’ dues to producers, which stood at Rs 1.1 lakh crore in early July.


Read also : Caught in debt, Indian states will have to borrow more money to repay loans


State finances in the spotlight

State governments’ stretched finances have come to the fore since elections in March this year, when Punjab, for example, promised freebies like 300 units of free electricity to every household. The scheme has increased the electricity subsidy burden by Rs 1,800 crore in the current year.

The Reserve Bank of India (RBI) earlier this year released a document on the risk analysis of state finances, in which it highlighted 10 states whose tax revenues have declined over the past five years. In addition, their debt to the gross domestic product of the state exceeded the target prescribed by the 15e finance committee.

“Slowing own-source tax revenue, a high share of outlays and an increasing burden of subsidies have strained state finances, already exacerbated by Covid-19,” the RBI document said. “New sources of risk have emerged in the form of increased spending on unmerited gifts, expanding contingent liabilities and lagging discoms.”

States like Andhra Pradesh, Bihar, Rajasthan, Punjab and West Bengal are among those identified as the most fiscally vulnerable and account for around half of the total expenditure of all states and union territories. , according to the RBI document.

For these states, the share of tax expenditures—spending on salaries, pensions, and subsidies, among others—in total spending ranges between 80 and 90 percent.

“Some states like Rajasthan, West Bengal, Punjab and Kerala spend around 90% on revenue accounts. in capital,” the RBI document said.

In a May press release on off-balance sheet government borrowing, CRISIL Ratings Director Aditya Jhaver said that “we believe cash flow support will be required for 50-55% of outstanding collateral, and that 4-5% of the States’ annual revenues will be consumed in the service of these obligations this financial year”.

“This is more than double the mark seen 4-5 years ago and will therefore partly limit their flexibility to finance investments in the near future,” he added.

(Editing by Nida Fatima Siddiqui)


Read also : Taming Subsidies, Raising Fees for Government Services – Center’s Advice to States to Cut the Deficit


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