States told to give fewer guarantees

new delhi: guarantee is a bad word in fiscal literature. the government is waking up to this trend by persuading states to put a cap on issue of guarantees as the ballooning level of contingent liabilities are threatening to throw their finances in further disarray. finance ministry officials said contingent liabilities of states stand at approximately rs 1,19,000 crore and they have grown leaps and bounds from the figure of rs 40,000 crore in the early 1990s. under the present budget-making standards of the government, contingent liabilities do not find a place as debt obligations. these liabilities therefore are hidden in nature and are not reflected in the financial of the states or the centre. experts said, once the fiscal responsibility act is in place at the centre, these liabilities will figure in the budget as debt obligations. the centre will also eventually have to work towards capping guarantees to keep its scorecard in good health, sources said. while guarantees are essentially aimed at encouraging investment in capital-intensive projects, it is the huge quantum of contingent liabilities that has created the need for having a debt-sustainable ceiling on them, sources said. states issue guarantees to commercial enterprises so that they manage to get a loan for financing their activities. guarantees are given in power sector, non-commercial housing, bonds issued by public enterprises, and in the agriculture sector. poor project returns and greater risk has put a strain on the states as far as debt obligations are concerned. sources said, bulk of the guarantees which bear high risk are in the areas of power and irrigation projects where the revenue stream is ill-defined. some states like karnataka have already taken a step ahead by drafting a fiscal responsibility bill which targets reduction of revenue deficit at sustainable levels. karnataka imposed a ceiling on government guarantees by way of a legislative amendment. other states like sikkim, gujarat, west bengal and andhra are looking at going slow on issuing guarantees. the move is being initiated by the centre as part of the medium-term fiscal reforms policy for putting state finances on the right track. technically, a state can issue guarantees to borrowings and the size of the guarantees can go up to the size of the consolidated fund of the state. in fact, article 293 of the constitution empowers state governments to issue guarantees within limits. states have also been asked to create a consolidated sinking fund for the purpose of servicing the debt obligations in case projects which are guarantee-backed backfire, sources said.

States told to give fewer guarantees

NEW DELHI: GUARANTEE is a bad word in fiscal literature. The government is waking up to this trend by persuading states to put a cap on issue of guarantees as the ballooning level of contingent liabilities are threatening to throw their finances i...

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