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State debt swap may cost Rs 4,000 crore a year

The Centre is planning a Rs 1,00,000 crore (Rs 1,000 billion) debt-swap package for the states to be undertaken in equal installments of Rs 25,000 (Rs 250 billion) over the next four years.

Finance ministry officials told Business Standard the Rs 1,00,000 crore (Rs 1,000 billion) high-cost debt essentially comprised central loans carrying interest rates of as high as 13.5-14 per cent a year with an average maturity of 12 years. The interest rate on these loans was likely to reset at 8-9 per cent a year, they said.

While this would come as a reprieve to the states, many of which were in a financial mess, the cost to the Centre in terms of interest income foregone was roughly estimated at Rs 4,000 crore (Rs 40 billion) a year, officials said.

The cost could be arrived at only by discounting the interest foregone every year over the tenure of these loans at an appropriate discount rate, they added. Put simply, it would be at least Rs 48,000 crore (Rs 480 billion) over the next 12 years.

Officials, however, said the package would be subject to the states compulsorily earmarking 20 per cent of their small savings, which have an average cost of 10.5 per cent, for retiring a portion of their earlier high-cost debt.

They pointed out while the Centre released 100 per cent of the small savings proceeds to the states in the first quarter of the current financial year, not even a single state showed any inclination towards pre-payment of central loans.

According to officials, affluent states may even be allowed to undertake additional market borrowings at prevailing low interest rates to repay their earlier debt. They said the quantum of additional market borrowings had not yet been decided.

The Centre and the Reserve Bank of India would ensure such borrowing did not have an adverse impact on the assiduously built soft interest rate regime, they said.

Officials said the tradeoff can be estimated by comparing the interest foregone by the Centre with the repayment made by the states. This would translate into higher capital receipts for the Centre in the next 2-3 years and to that extent help in reducing the fiscal deficit.

In the long run though, the Centre would lose out on the high interest rate which would have been otherwise offered by the states.

Finance Minister Jaswant Singh had last month promised a fiscal package for the states by the end of September. He had constituted a committee including officials from the Reserve Bank of India to hammer out a bailout package for the states.

The committee is of the opinion that the states’ fiscal problems need to be resolved fast. “The states are in a debt trap. And the build-up of debt in the case of most of the states has largely been during the last 4-5 years,” an official said.

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