The Hindu : Centre may give 'timely assistance'

Online edition of India's National Newspaper
Friday, Feb 14, 2003

Southern States

Southern States - Tamil Nadu

Centre may give 'timely assistance'

By V. Jayanth

CHENNAI Feb. 13. The Tamil Nadu Government is expecting "timely assistance" from the Centre, possibly before the end of the financial year.

There are indications of its offering a `facility' to the States, which have embarked on serious fiscal reforms, and this could be available by March. Another source of assistance is a `debt swap' arrangement, which the Finance Minister, Jaswant Singh, promised Chief Ministers at a meeting last year to deal with the fiscal crisis confronting the States.

If assistance on both these avenues is available, Tamil Nadu may be able to breathe a little easy on its borrowings and contain the interest burden, which rose dramatically in the late 1990s, according to official sources.

Short-term relief

The Centre has indicated in principle its willingness to extend a `new facility' to the States, which have taken up fiscal reforms seriously, say the sources. Following a representation from Tamil Nadu that the Rs. 402-crore ``fiscal reforms facility'' was "grossly inadequate" to soften the burden of reforms, the Union Finance Ministry is ready, it appears, to offer another form of assistance before March-end to help the State tide over the crisis, at least in the ``short-term''.

Officials expect that the assistance could be in the form of a `borrowing facility' at the current rate of interest, which itself may be "cheaper" and may enable the Government to retire some older loans.

Similarly, under the `debt-swap' arrangement, the Centre may provide assistance to convert about Rs. 3000 crores of high interest loans into low interest debts over three-four years.

The officials say these two arrangements can provide "some relief in the short-term", particularly at a time when the State is reeling under a huge debt burden and payment of interest. Even as of March 2000, the total public debts stood at Rs. 23,840 crores, with the interest liability climbing from Rs. 557 crores in 1991-92 to Rs. 3,000 crores in 2000-01.

The sources explain that debt servicing as a percentage of free borrowings breached the 100 level even in 1995-96 and touched 108.21 in 1996-97. After a marginal decline, it again reached 102.6 per cent in 1999-2000 - which means that the entire borrowings, and more, went into repayment of liabilities.

Why the crisis

The reasons for the crisis and the virtual collapse of the State's finances are not far to seek. The many tax reliefs, major concessions to government employees and the burden of implementing the Fifth Pay Commission recommendations led to a "collapse" of the fiscal system.

To illustrate the interest burden, the officials say the payment, as a percentage of the State's revenue deficit shot up from 2.94 in 1995-96 to 10.04 in 1997-98. Even that was manageable.

The year 1998-99 and the following fiscal broke the back of the State's finances, with the figure rising to 24.10 and 26.95 per cent respectively. This is considered "unsustainable", affecting the State's borrowing capacity.

Normally, a government borrows either to bridge its revenue deficit or provide for development works, but a stage had come when Tamil Nadu was "borrowing to repay its loans and the interest on them".

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