States Still Pay Dear on Plan Loans
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.
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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.