Debt-swap plan takes off on small savings boom

CHENNAI: After much dithering, the Centre-state debt swap policy seems to be getting off the drawing board. The plan is being implemented by all states barring West Bengal and Maharashtra.
The Centre’s capital receipts would swell by Rs 12,000 crore, when the states prepay expensive debt to the Centre with cheaper small saving funds transferred to them.
And state finances would gain in the years to come with smaller interest payment outgo. Till two months ago, only 17 states had agreed to implement the debt swap plan. However, in the last one month, nine states have come forth to implement it this fiscal. This takes the number to 27 including Delhi. The reason is that small savings collections have been particularly buoyant this year and states do not mind utilising a portion of it to reduce their future interest burden. Interestingly, even excluding big collecting states like West Bengal and Maharashtra, the net proceeds to other states have been pretty attractive, said sources.
Small saving collections have been growing at a healthy 8-10% over the years. But this fiscal, the growth has been unprecedented. In the first four months, the net proceeds grew by 31%. Finance ministry sources said, Rs 12,000 crore worth of small savings transfers would be utilised for debt swap by state governments. The government has targeted a gross mop-up of Rs 91,500 crore for the current fiscal against the revised estimate of Rs 90,000 crore in ’01-02. The disbursements in ’02-03 are pegged at Rs 51,500 crore. So, a sum of Rs 40,000 crore (net of withdrawals) is expected to be transferred to states in toto.
However, the collections have been so buoyant that a sum of Rs 12,000 crore, which is net of withdrawals and excludes collections by West Bengal and Maharashtra, is available for the debt swap plan.
The ministry is hopeful of effecting a Rs 25,000-crore debt swap exercise this year as collections are expected to be more buoyant in the last two months of the fiscal, when incidence of tax savings is high. As per the debt swap formula, the entire net proceeds of small savings will be transferred to states who will use 20% of the proceeds to retire high-cost debt. The debt prepayment by states will be channelised to the National Small Savings Fund. States which are part of the debt swap programme also gain access to a Rs 10,000-crore open market borrowing programme.
The open market borrowing of Rs 10,000 crore will be divided among states as per their ratio of outstanding debt. From September, the Centre has started transferring 80% of the proceeds and withholding 20% of the amount which is to be readjusted as debt prepayment by states. The reason for the surge in small savings collections is the lack of avenues to park funds for investors. Despite the rate cuts on small savings, these instruments have proved to be very attractive. The rates on various small saving schemes range from 8% (on deposit scheme for retiring government employees) to 9% (on national saving certificates, post office monthly income account and PPF).
The return on these schemes is higher than on the 8% RBI relief bonds, a hugely popular investment opportunity on which the government imposed a Rs 2 lakh ceiling this year. The government has about 10 small savings instruments like the kisan vikas patras, postal savings, NSC and schemes for retiring employees.