Wouldn't
it be
great if, in these times of soft interest rates,
someone offers you a return of 10.5 per cent on debt,
that too tax-free? Well, unfortunately you are not
that lucky; for that you will need to be the Union
Government.
Indeed, 10.5 per cent
is the rate that the Centre charges on Plan loans to
State Governments. And since there is no question of
the Centre paying tax to itself, this return is
entirely tax-free!
What is more, 10.5 per cent is the interest on fresh
loans to be advanced in 2003-04. During the current
fiscal, States have been forking out an even higher
rate of 11.5 per cent on Plan loans from the Centre.
As against this, the average coupon on their market
borrowings this year would work out to only 7.2 per
cent. In the just concluded on-tap auctions of 10-year
paper, State Governments successfully mobilised Rs
14,151 crore in two tranches at coupon rates of
6.75-6.95 per cent.
|
Interest Rates on State Govt. Borrowings |
|
Year |
Plans Loans |
Market
Borrowings* |
Small
Savings Loans |
|
1997-98 |
13.00 |
12.82 |
14.50 |
|
1998-99 |
12.50 |
12.35 |
14.50 |
|
1999-2k |
12.50 |
11.89 |
13.50 |
|
2000-01 |
12.50 |
10.99 |
12.50 |
|
2001-02 |
12.00 |
9.20 |
11.00 |
|
2002-03 |
11.50 |
7.20 |
10.50 |
|
2003-04 |
10.50 |
- |
- |
|
* weighted
average of coupon/cut -off yields |
|
In other words, even
after the 100 basis points cut in Plan loan rates
announced by the Finance Minister in his reply to the
Finance Bill early this week, States are still paying
around 350 basis points more than the market rate on
these loans.
The accompanying Table shows that while the average
cost of funds raised by States through market
borrowings and loans against small savings collections
has fallen by 400-560 basis points since 1997-98, the
Centre has brought down its corresponding rate of Plan
loans by just 250 basis points. To get a better idea
of the magnitudes involved, it may be noted that
during 2002-03, total Plan loans from the Centre to
States is budgeted at Rs 30,238 crore, while the gross
market borrowings allocated to them amounted to only
Rs 17,276 crore. In addition, the States raised Rs
52,200 crore through issue of special securities
bearing 10.5 per cent interest to the National Small
Savings Fund.
What this implies is that a substantial part of the
States' borrowings are being made at way above
‘market-determined' rates. True, Plan loans are for 20
years maturity, whereas the bulk of market borrowings
are for 10 years. But even here, the 10.5 per cent
interest on 20-year Plan loans is higher than the
10.25 per cent rate that HDFC charges on home loans of
similar maturity.
The impact of this on State finances can be gauged
from the fact that the Centre's interest receipts on
loans to States during 2003-04 is budgeted at Rs
30,022.51 crore. If one adds loan recoveries of Rs
13,216.63 crore to this, the Centre's earnings through
loans to States would almost equal the Rs 44,070 crore
it expects to realise from income tax. The Centre has
sought to make things easier for States by allowing
them to utilise 20 per cent of their net small savings
proceeds to pre-pay past high-cost Plan loans. But
States would prefer that these loans be retired
through additional market borrowing entitlements,
which offers a cheaper debt swap option relative to
small savings. The Centre, however, is hesitant as it
feels enhanced market borrowings by States will lead
to tightening of liquidity conditions.
The States, in turn, argue that their existing
borrowing allocation of Rs 18,000 crore is a fraction
of the Centre's gross borrowing programme of Rs
1,66,000 crore for 2003-04 and the latter should,
therefore, be more liberal in allowing them to access
the market. As a result, the Centre has been forced to
allocate additional market borrowings of Rs 10,000
crore each in the current and ensuing fiscal towards
the debt-swap scheme.
