STATE GOVERNMENTS

Ways and Means Advances

11.24 The Reserve Bank provides WMA to States with a view to help them tide over temporary mismatches in cash flow. The WMA limits are fixed by the Reserve Bank from time to time. Drawing from the recommendations of the Ramachandran Committee (2002) and consultations with the State Governments, the Reserve Bank revised the Scheme of Ways and Means Advances for the States, effective March 3, 2003 to give them the benefit of higher limits in the last month of the fiscal year. The revised normal WMA limits have been computed by taking into account the average of revenue receipts for the three fiscal years 1999-2000, 2000-01 and 2001-02 and then applying a multiplication factor of 3.19 for the non-special category States and 3.84 for the special category States. The total normal WMA limits effective from March 3, 2003 at Rs.7,170 crore was 18.8 per cent higher than the earlier limit of Rs.6,035 crore (Table 11.11).

Table 11.11 : Normal WMA Limits of States
(Rupees crore)
	State	WMA Limits 1996	WMA Limits 1999	WMA Limits 2001	WMA Limits 2002	WMA Limits 2003
		(effective from	(effective from	(effective from	(effective from	(effective from
		August 1, 1996)	March 1, 1999)$	February 1, 2001)	April 1, 2002)	March 3, 2003)*
	1	2	3	4	5	6
	Non-Special Category States
1.	Andhra Pradesh	168	288	463	520	620
2.	Bihar	118	195	220	245	305
3.	Chhattisgarh		82	91	100	130
4.	Goa	17	24	25	50	50
5.	Gujarat	118	243	393	445	485
6.	Jharkhand		51	57	75	105
7.	Haryana	50	99	167	180	205
8.	Karnataka	134	228	331	375	460
9.	Kerala	101	144	215	225	270
10.	Madhya Pradesh	134	221	244	275	345
11.	Maharashtra	252	483	685	760	905
12.	Orissa	101	141	159	185	215
13.	Punjab	101	141	200	235	240
14.	Rajasthan	101	202	288	310	365
15.	Tamil Nadu	185	281	402	415	570
16.	Uttar Pradesh	286	531	559	630	755
17.	West Bengal	168	235	295	360	420
	Sub Total	2,033	3,589	4,794	5,385	6,445
	Special Category States
1.	Arunachal Pradesh	17	28	35	50	50
2.	Assam	67	114	161	180	210
3.	Himachal Pradesh	34	59	92	115	135
4.	Manipur	17	25	38	50	50
5.	Meghalaya	17	25	30	50	50
6.	Mizoram	17	25	28	50	50
7.	Nagaland	17	26	40	50	55
8.	Tripura	17	31	46	55	60
9.	Uttaranchal		19	19	50	65
	Sub Total	202	352	489	650	725
	Total	2,234	3,941	5,283	6,035	7,170
$ Report of the Informal Advisory Committee on WMA to State Governments (Chairman: Shri B.P.R. Vithal, November 1998). * Report of the Advisory Committee on WMA to State Governments (Chairman: Shri C. Ramachandran, January 2003).

11.25 The special WMA continues to be linked to the investments made by State Governments in Government of India securities. A lower and uniform margin of 5 per cent (compared with the 10 to 15 per cent margin earlier) would be applied on the market value of the securities for determining the operating limit of special WMA. The States would have to avail of special WMA limits first at a rate of one per cent below the Bank Rate before seeking accommodation under the normal WMA limits. The number of days that a State can be in overdraft (OD) has been extended to 14 consecutive working days from the earlier 12 consecutive working days. The OD regulation for State Governments has been made more stringent. With effect from April 1, 2003, the State Governments cannot remain in OD for more than 36 working days in a quarter (Table 11.12).

11.26 The outstanding WMA and OD of the State Governments was lower by 52.9 per cent in 2002-03 as compared with the previous year. For a majority of the States, the utilisation of WMA and OD came down significantly in 2002-03, indicating improved management of cash flows (Table 11.13).

Table 11.12 : WMA to State Governments - Earlier and the New Arrangements
	Item	Earlier Arrangement	New Arrangement
	1	2	3
Normal WMA
1.	Methodology for Computation of Limit	Average of revenue receipts and capital expenditure of the latest three years multiplied by a ratio of 2.4 for non-special category States and 2.9 for special category States.	Average of only revenue receipts of latest three years multiplied by a ratio of 3.19 for non-special category Sates and 3.84 for special category States.
2.	Aggregate Normal WMA Limits	Rs.6,035 crore	Rs.7,170 crore
	i) Non-Special Category States	Rs.5,385 crore	Rs.6,445 crore
	ii) Special Category States	Rs.650 crore	Rs.725 crore
3.	Rate of interest	Bank Rate	Bank Rate for the period of 1-90 days and 1 per cent above the Bank Rate for the period beyond 90 days.
Special WMA
4.	Computation of limits (Margin)	15 per cent*	5 per cent uniformly.
		10 per cent**
5.	Rate of interest	Bank Rate	1 per cent below the Bank Rate.
6.	Use of Special WMA	This is availed of after Normal WMA.	To be availed of before utilising Normal WMA limit.
Overdraft Regulation Scheme
7.	No. of consecutive working Days a State can be under OD (excluding holidays)	12	14
8.	No. of working days in a quarter a State can be in OD	-	36
9.	No. of consecutive working days OD can be in excess of the Normal WMA limit	5	5
10.	Rate of interest	Bank Rate plus 2 per cent	OD up to 100 per cent of Normal WMA at 3 per cent above the Bank Rate and for OD exceeding 100 per cent of Normal WMA at 6 per cent above the Bank Rate.
* For securities with residual maturity of more than 10 years. ** For securities with residual maturity of less than 10 years.

11.27 The weekly average utilisation of WMA and OD during 2003-04 (up to July 2003) was lower, mainly due to higher small savings collections and larger market borrowing (Table 11.14). Stricter OD regime with higher rate of interest has presumably reduced States’ resort to OD. There has, however, been a sharp increase in States’ resort to special WMA as States are allowed to avail of special WMA before seeking accomodation under the normal WMA.

Market Borrowings of State Governments

11.28 States resorted to large volumes of market borrowings in 2002-03. States raised Rs.30,853 crore (Rs.27,880 crore through tap issuances and Rs.2,973 crore through auctions), an increase of 65 per cent over Rs.18,707 crore (Rs.15,942 crore through tap issuances and Rs.2,765 crore through auctions) during 2001-02 (Table 11.15). The interest rates on tap issues ranged between 6.60-7.80 per cent with a spread fixed in the range between 38-52 basis points over the corresponding secondary market yield of Government of India dated securities (Table 11.16). The cut-off yields on auctions ranged between 6.67-8.00 per cent with a spread ranging between 20-76 basis points over the corresponding secondary market yield of Government of India dated securities. Of the States that used the auction method, some were able to mobilise loans at competitive rates (Punjab and Andhra Pradesh) while others had to pay higher rates (Kerala and Jammu and Kashmir) (Table 11.17).

11.29 The provisional net allocation for the State Governments under their market borrowing programme during 2003-04 is kept at Rs. 24,000 crore including additional allocation of Rs. 4,000 crore. Taking into account the repayment of Rs. 4,145 crore, the gross (provisional) allocation amounts to Rs. 28,145 crore. During the current year so far (up to August 11, 2003), an aggregate amount of Rs. 22,896 crore has been raised by the State Governments under the market borrowing programme.

Table 11.13 : Utilisation of WMA and Overdrafts by State Governments
	States	WMA		Overdraft (OD)
		2001-02	2002-03	2001-02			2002-03
		No. of	No. of	No. of		No. of	No. of	No. of
		days	days	Occasions		Days	Occasions	days
	1	2	3	4		5	6	7
	Non-Special Category States
1.	Andhra Pradesh	336	72	24		173	6	33
2.	Bihar	265	1	16		123	0	0
3.	Goa	219	266	11		68	9	66
4.	Gujarat	307	219	11		72	13	47
5.	Haryana	299	64	16		70	4	21
6.	Karnataka	40	157	0		0	1	1
7.	Kerala	359	330	27		222	28	196
8.	Madhya Pradesh	290	251	15		173	22	176
9.	Maharashtra	332	301	15		129	17	154
10.	Orissa	364	329	31		258	21	189
11.	Punjab	259	214	17		120	11	53
12.	Rajasthan	309	329	23		169	21	151
13.	Tamil Nadu	359	326	24		152	13	73
14.	Uttar Pradesh	217	229	13		88	14	79
15.	West Bengal	365	318	28		253	28	260
16.	Chhattisgarh	0	0	0		0	0	0
17.	Jharkhand	1	0	0		0	0	0
	Special Category States
1.	Arunachal Pradesh	13	27	0		0	0	0
2.	Assam	365	121	19		312	24	315
3.	Himachal Pradesh	342	252	29		233	27	181
4.	Manipur	365	333	19		331	19	350
5.	Meghalaya	0	78	0		0	1	1
6.	Mizoram	270	184	10		81	4	24
7.	Nagaland	188	297	8		72	19	143
8.	Tripura	86	28	0		0	0	0
9.	Uttaranchal	142	180	10		85	9	41

Table 11.14 : WMA, Special WMA, Overdraft and Investment in Treasury Bills (Weekly Averages)
(Rupees crore)
Month	Normal WMA			Special WMA			Overdraft				Investment in
											Treasury Bills
	2003-04	2002-03	2001-02	2003-04	2002-03	2001-02	2003-04		2002-03	2001-02	2003-04	2002-03	2001-02
1	2	3	4	5	6	7	8		9	10	11	12	13
April	2,145	2,924	3,925	989	835	666	1,088		2,987	1,863	3,894	1,652	2,832
May	1,816	2,961	2,638	941	480	345	445		1,428	681	4,987	2,404	3,483
June	1,179	3,007	2,223	937	559	331	204		1,022	508	6,232	3,670	4,664
July	2,160	3,295	2,875	1,138	658	491	612		1,252	863	4,095	2,727	4,219
August		2,058	2,798		507	539			817	911		4,367	2,916
September		2,875	3,542		610	760			924	1,851		4,389	1,764
October		3,238	3,586		709	652			1,860	1,693		3,156	1,704
November		3,673	3,730		704	769			1,575	1,990		2,396	1,595
December		4,454	4,244		833	950			1,407	2,292		2,440	1,232
January		3,982	4,217		922	951			1,431	2,024		3,299	1,067
February		3,352	3,506		493	922			1,351	1,733		3,371	1,437
March		2,806	3,746		832	839			715	2,447		3,301	955

Table 11.15 : Market Borrowings of State Governments in 2002-03
(Rupees crore)
	States	Gross Borrowings	Repayment	Net	Gross Amount	Gross Amount
				Borrowings	Raised by Auction	Raised through Tap Sale
	1	2	3	4	5	6
1.	Andhra Pradesh	3,401	175	3,226	545	2,857
2.	Arunachal Pradesh	34	0	34	-	34
3.	Assam	911	23	888	-	911
4.	Bihar	1,335	135	1,200	-	1,335
5.	Chhattisgarh	464	15	449	-	464
6.	Goa	155	0	155	-	155
7.	Gujarat	2,537	68	2,469	445	2,092
8.	Haryana	756	41	714	-	756
9.	Himachal Pradesh	698	14	684	-	698
10.	Jammu and Kashmir	596	18	576	70	526
11.	Jharkhand	455	46	409	-	455
12.	Karnataka	1,611	101	1,510	200	1,411
13.	Kerala	1,237	103	1,134	445	792
14.	Madhya Pradesh	1,137	40	1,097	247	890
15.	Maharashtra	1,074	74	1,000	509	565
16.	Manipur	77	8	69	-	77
17.	Meghalaya	87	0	87	-	87
18.	Mizoram	118	0	118	-	118
19.	Nagaland	178	11	167	-	178
20.	Orissa	1,308	106	1,202	-	1,308
21.	Punjab	1,141	79	1,062	85	1,056
22.	Rajasthan	2,383	119	2,264	-	2,383
23.	Sikkim	20	0	20	-	20
24.	Tamil Nadu	2,325	186	2,139	275	2,050
25.	Tripura	121	9	113	-	121
26.	Uttar Pradesh	3,237	299	2,938	-	3,237
27.	Uttaranchal	950	16	934	-	950
28.	West Bengal	2,506	101	2,405	153	2,353
	Total	30,853	1,789	29,064	2,973	27,880

11.30 The weighted average yield recorded a decline of 1.71 percentage points in 2002-03 (Table 11.18). The State wise maturity profile of outstanding State Governments’ market loans suggests that almost 75 per cent of the loans are in the maturity bucket of 5-10 years (Table 11.19).

11.31 The distribution of annual repayment of the State Governments’ market loans is even but weighted at the longer end (Table 11.20).

11.32 As in the case of the Centre, the profile of the outstanding stock of the State Governments in terms of interest rate ranges indicates that over two-third of loans are contracted at interest rates of 10 per cent and more (Table 11.21).

Debt Restructuring

11.33 The Union Budget for 2003-04 has envisaged measures for debt restructuring as a part of fiscal consolidation. They encompass pre-payment of external debt, buy-back of loans by the Government from the banks on voluntary basis and restructuring of State Governments' debt to the Centre through a debt swap scheme.

11.34 Pre-payment of 'high-cost' currency pool loans from the World Bank and the loans from the Asian Development Bank and switching of this amount with domestic loans would reduce the cost to the Central Government. Accordingly, the Central Government prepaid foreign currency loans to these institutions amounting to US $ 3.0 billion. The possibility of further repayments of external debt is being explored.

Table 11.16 : Market Borrowings Raised through Tap Issuance
	Name of the State	Tap Issue
		April	August	December	February	February	March
		23-26, 2002	19, 2002	23, 2002	4, 2003	25-26, 2003	12-17, 2003
		7.80%	7.80%	6.80%	6.60%	6.95%	6.75%
	1	2	3	4	5	6	7
1.	Andhra Pradesh	387	443	0	809	876	342
2.	Arunachal Pradesh	8	5	3		14	4
3.	Assam	89	177	119		303	223
4.	Bihar	184	327	227		299	298
5.	Chhattisgarh	56	155	0		137	115
6.	Goa	34	27	48		34	11
7.	Gujarat	344	240	361		694	453
8.	Haryana	130	78	169		289	90
9.	Himachal Pradesh	104	150	100	100	175	69
10.	Jammu and Kashmir	61	46	30	212	90	87
11.	Jharkhand	88	97	65		129	76
12.	Karnataka	150	300	352		457	151
13.	Kerala	0	251	197		258	86
14.	Madhya Pradesh	109	370	0		281	130
15.	Maharashtra	328	237	0		0	0
16.	Manipur	10	28	21		14	5
17.	Meghalaya	21	29	20		13	4
18.	Mizoram	10	14	81		10	3
19.	Nagaland	36	53	74		7	7
20.	Orissa	154	280	187		353	334
21.	Punjab	212	127	0		451	266
22.	Rajasthan	249	426	284		713	712
23.	Sikkim	0	6	4		10	0
24.	Tamil Nadu	309	406	146		729	460
25.	Tripura	25	35	24		20	17
26.	Uttar Pradesh	433	814	542		849	599
27.	Uttaranchal	57	23	286		292	292
28.	West Bengal	384	229	0		902	838
	Total	3,974	5,374	3,341	1,121	8,398	5,671

Table 11.17 : Market Borrowings Raised through Auctions
(Amount in Rupees crore; cut-off yield in per cent)
	Name of State	2002-03
		Date of Auction	Amount	Cut-off
	1	2	3	4
1.	Andhra Pradesh	27.06.02	250	7.90
		10.12.02	295	6.67
2.	Gujarat	27.06.02	245	7.83
		30.10.02	200	7.33
3.	Jammu and Kashmir	27.06.02	70	8.00
4.	Karnataka	27.06.02	200	7.90
5.	Kerala	11.04.02	225	8.00*
6.	Madhya Pradesh	18.11.02	247	6.94
7.	Maharashtra	27.06.02	279	7.83
8.	Punjab	18.11.02	85	6.80
9.	Tamil Nadu	30.10.02	275	7.30
10.	West Bengal	30.10.02	153	7.35
	Total		2,973
* Reissue

11.35 The buy-back of high coupon loans by the Central Government from banks and debt-swap by the State Governments are the two schemes aimed at restructuring the domestic debt. The scheme of debt buyback, as announced in the Union Budget for 2003-04, was implemented on July 19, 2003. Government of India bought back 19 high cost, illiquid securities worth Rs. 14,434 crore (face value), by paying a premium of Rs. 3,472 crore. In lieu of these securities, four liquid securities were issued. The buy-back was conducted through a novel auction process whereby participants were able to revise their offers in a live interactive mode. The buy-back was conducted on a voluntary basis and banks were allowed additional income-tax deduction to the extent such business income was used for provisioning of their NPAs.

Table 11.18 : Yield of State Government Loans Issued during the Year
(Per cent per annum)
Year	Range	Weighted
		Average
1	2	3
1995-96	14.00	14.00
1996-97	13.75-13.85	13.83
1997-98	12.30-13.05	12.82
1998-99	12.15-12.50	12.35
1999-00	11.00-12.25	11.89
2000-01	10.50-12.00	10.99
2001-02	7.80-10.53	9.20
2002-03	6.67-8.00	7.49

Table 11.19 : Maturity Profile of Outstanding State Government Loans (As on March 31, 2003) P
(Rupees crore)
State	Under 5 years	5-10 years	Total
1	2	3	4
1. Andhra Pradesh	2,942	11,315	14,257
2. Arunachal Pradesh	30	106	136
3. Assam	960	2,717	3,678
4. Bihar	2,966	5,560	8,526
5. Chhattisgarh	0	803	803
6. Goa	91	521	612
7. Gujarat	1,360	6,291	7,651
8. Himachal Pradesh	225	1,759	1,983
9. Haryana	723	2,016	2,739
10. Jammu and Kashmir	365	1,434	1,800
11. Jharkhand	0	948	948
12. Karnataka	1,302	5,746	7,047
13. Kerala	1,904	4,606	6,510
14. Maharashtra	2,282	5,150	7,432
15. Madhya Pradesh	2,078	4,567	6,644
16. Manipur	100	252	352
17. Meghalaya	138	413	551
18. Mizoram	65	262	326
19. Nagaland	199	691	890
20. Orissa	2,111	4,769	6,880
21. Punjab	1,014	3,039	4,054
22. Rajasthan	2,145	7,671	9,816
23. Sikkim	77	164	241
24. Tripura	121	462	582
25. Tamil Nadu	2,324	6,676	9,000
26. Uttaranchal	0	1,178	1,178
27. Uttar Pradesh	5,601	13,547	19,148
28. West Bengal	2,528	6,754	9,282
Total	33,648	99,418	1,33,066
P : Provisional.

Table 11.20 : Repayment Schedule of Outstanding State Government Loans (As on March 31, 2003)
(Rupees crore)
Year	Amount*
1	2
2003-04	4,145
2004-05	5,123
2005-06	6,274
2006-07	6,551
2007-08	11,554
2008-09	14,400
2009-10	16,511
2010-11	15,870
2011-12	22,032
2012-13	30,605
* Outstandings are likely to increase on account of issue of power bonds by State Governments with retrospective effect from October 1, 2001.

Table 11.21 : Interest Rate Profile of Outstanding State Government Loans (As on March 31, 2003)
Range of Interest Rate	Outstanding Amount	Percentage to
(per cent)	(Rupees crore)	Total
1	2	3
Less than 7 per cent	19,585	14.72
7.00-7.99	11,030	8.29
8.00-8.99	8,004	6.02
9.00-9.99	5,411	4.07
10.00-10.99	14,563	10.94
11.00-11.99	17,062	12.82
12.00-12.99	31,269	23.50
13.00 and above	26,142	19.65
Total	1,33,066

11.36 Under the debt-swap scheme mutually agreed to between the Central and the State Governments, all State loans from the Centre bearing coupons in excess of 13 per cent would be swapped with market borrowings and small savings proceeds at prevailing interest rates over a period of three years ending in 2004-05. As a consequence, States are expected to save at least Rs.81,000 crore in interest and deferred loan repayments over the residual maturity period of the loans. In 2002-03, 25 State Governments (excluding Maharashtra, Sikkim and West Bengal) were permited to prepay high cost debt from the Centre, partly out of small savings collections and partly through fresh market borrowings of Rs.10,000 crore conducted in two tranches in February and March 2003. The scheme has been continued in 2003-04. During the current year so far (up to August 12, 2003), the State Governments raised Rs. 15,000 crore from the market for this purpose. Another tranche of debt swap for Rs. 8,000 crore has been announced.

11.37 The major risk associated with the management of public debt is the size of the debt itself and the pressure on account of its servicing. The high debt accumulation since the mid-1990s has created a heavy debt servicing burden. Various policy measures evolved over the years which, inter alia, included market related primary issuance of government securities, introduction of varied instruments and alignment of the maturity period of new issues of debt while keeping in view redemption pattern of existing debt stock. The objective of the recent initiatives in debt restructuring is to resolve the problem of the debt overhang and strengthen fiscal consolidation (Box XI.2).

Box XI.2 Debt Restructuring Fiscal adjustments through debt restructuring aim at mitigating the burden associated with unsustainable debt-GDP ratios and rising debt servicing. It involves a combination of debt conversion and debt reduction strategies by employing instruments like debt-swap, debt buyback, rescheduling, debt relief and concessional refinancing. The theoretical rationale for explicit debt reduction is based on the premise that if the debt exceeds the country's repayment ability in the future, expected debt service is likely to be an increasing function of the country's output level. When the country is unable to service its debt in full, the incentive to invest in the debtor country declines. This effect is known as debt overhang. Economic performance is affected by the debt overhang through crowding out, lack of access to international financial markets, and the effects of the debt on the general level of uncertainty in the economy. The debt overhang thus acts like an implicit marginal tax on investment. The principal benefit of reduction in debt overhang is the improvement in investment incentives for private investors and liquidity relief, in addition to capital gains to creditors. The success of debt restructuring process depends on whether the country is on the right or wrong side of the "debt laffer curve". If the country is on the wrong side of the debt laffer curve, debt restructuring (via buyback) may prove counterproductive and may not decrease the debt service payments. The three basic approaches of debt restructuring are market buy-backs, debt swaps and debt reduction agreements. The attractiveness of debt buybacks depends on whether they pay larger expected rates of return than other assets, and how the returns are distributed. Debt buy-backs yield an expected return equal to the risk-free interest rate, if distortions in sovereign lending are removed. Debt swaps are financial contracts that obligate one party to exchange a set of payments it owns for another set of payments owned by another party. They enable the country to bring forward in time the discounted benefits of a future debt write down. The kind of domestic liability that the government employs to finance the swap matters considerably. As long as the budget is continuously balanced, debt for bond swaps have no impact beyond that of a private sector debt repurchase. Money financed swaps, on the other hand, can lead to a situation of excess liquidity which can have other macroeconomic consequences. If debt swaps lead to an accumulation of domestic debt which is monetised subsequently, there would be a threat to domestic inflation. Since the late 1980s, many highly indebted countries have devoted considerable resources to repurchasing some of their outstanding debt at a discount on the secondary market. Countries like the Philippines, Mexico, Venezuela and Brazil had negotiated many market-driven deals for restructuring of debt which involved reduction in banks' claims at a price broadly in line with that prevailing in the secondary market. Subsequently, the holders of the debt being restructured have experienced an appreciation in the value of restructured claims. This appreciation also helped in improving the preception of country risk. Cross-country experiences in debt restructuring suggest that debt restructuring leads to lower debt servicing obligations and reduction in the debt overhang. References 1. Claessens S., E. Detragiache, P. Wickham and R. Kanbur (1996), "Analytical Aspects of the debt Problems of Heavily Indebted Poor Countries", World Bank Policy Research Working Paper No. 1618. 2. Detragiache, E (1991), "Sensible Debt Buybacks for Highly Indebted Poor Countries", World Bank Policy, Research and External Affairs Working Paper No. WPS 621.

 

Scheme for Settlement of State Electricity Boards (SEB) dues

11.38 Based on the recommendation of Ahluwalia Committee (2001), a scheme for one-time settlement of outstanding dues of the State Electricity Boards (SEBs) to Central Power Sector Undertakings (CPSUs) was finalised. Under the scheme, the State Governments will issue 15-year bonds worth about Rs.30,000 crore to the CPSUs for the outstanding dues at a nominal tax-free interest rate of 8.5 per cent per annum repayable over 10 years after a moratorium period of five years. Subject to the approval of the Reserve Bank, 10 per cent of the bonds can be off-loaded in the market each year for trading. The Tripartite Agreements (TPA) in this regard have been signed among the Government of India, the Reserve Bank and 25 State Governments (Box XI.3).

Box XI.3 Power Bonds: One Time Settlement of Dues of State Electricity Boards The State Electricity Boards (SEBs) have reached the verge of financial collapse owing to mismanagement, high transmission and distribution losses, irrational tariffs, degraded plant and machinery, and bloated workforce, reflected in the rising overdues of Central Public Sector Undertakings (CPSUs). The Expert Committee on the one-time settlement of State Electricity Board Dues (Chairman: Shri. M.S. Ahluwalia, 2001) suggested that a one-time settlement of outstanding dues should be attempted by shifting the burden of clearing these dues to State Governments while providing a package of relief and also a set of penalties and incentives favouring discipline and future reforms. The Committee recommended signing of Tripartite Agreements (TPA) among the Ministry of Finance, the Reserve Bank and the respective State Governments in this regard. The Scheme of One Time Settlement of SEB dues by way of securitisation to the CPSUs, as recommended by the Ahluwalia Committee, is being implemented. Current Dues If payments for the current dues of CPSUs are not received from the SEBs by the due date (within 90 days from date of billing), the amounts will be paid by the Government of India (GoI) to the CPSUs. The GoI in turn will get the amounts from the State Government through issue of payment instruction to the Reserve Bank to transfer funds from the respective State's account to GoI account. The Reserve Bank will act as per the specific instructions to be given by the GoI regarding amounts to be deducted under the TPA on each occasion. The payments of the current dues will be made subject to availability of funds in the account of the State Government. Securitisation of past dues - Issue of Power Bonds The Committee recommended that the overdues of the SEBs (till a cut-off date) should be securitised and power bonds should be issued by the State Governments to the CPSUs. The Reserve Bank as debt manager to the States should manage the issue of the bonds. The bonds would be issued with retrospective effect from October 1, 2001 at a nominal tax-free interest rate of 8.5 per cent per annum to the respective CPSU in 20 equal parts to facilitate trading and redemption of the bonds and each part will carry a fixed tenor with bullet redemption, the last being on April 1, 2016. The bonds should be issued in demat form to the original investors and interest will be paid half-yearly on April 1 and October 1 of each year. Furthermore, the bonds can be sold in the market only with specific prior approval of the Reserve Bank on each occasion and will enjoy SLR status when acquired by banks/institutions in the secondary market. The servicing of the bonds will not be done during the period of stoppage of payments on behalf of the State Government concerned. To facilitate early redemption of the bonds by the States, the bonds would have a call option usable at any point of time on or after five years of issue of the Power Bonds for part or full redemption with notice period of two months. TPAs have been signed with 24 States on March 20, 2003.

 

Conference of State Finance Secretaries

11.39 The Reserve Bank has been organising the Conference of State Finance Secretaries since November 7, 1997. These conferences are held biannually to discuss the issues and problems related to cash and debt management of the State Governments. The Conference has emerged as an important single point forum for interaction among State Governments, Government of India, Planning Commission, Comptroller and Auditor General, Controller General of Accounts and the Reserve Bank. In the 10th Conference held on June 7, 2002, important issues like difficulties in the market borrowings of the State Governments, overdraft regulation scheme for States and finances of local bodies were deliberated upon. The Reserve Bank's customer service to Central and State Governments and the accounting and reconciliation procedure of the State Government transactions were also discussed. The major issues and recommendations in regard to the Draft Report of the Group on Interest Burden of States and Draft Report of the Group to Assess the Fiscal Risk of State Government Guarantees were also discussed. In the 11th Conference held on January 9, 2003, recommendations of the Advisory Committee on WMA of State Governments (Ramachandran Committee) were discussed and accepted with some modifications. A Group of Finance Secretaries was constituted to study the pension liabilities of the State Governments. Discussions on the Report of the Group to assess the Fiscal Risk of State Government Guarantees (2002) addressed the need to assign fiscal risk to different guarantees and their implications for State finances. The 12th Conference of State Finance Secretaries was held on August 1, 2003. The major issues deliberated upon in the Conference were defaults in the servicing of guaranteed bonds, market borrowings of State Governments, infrastructure financing, restructuring of State level PSUs, One-time Settlement of SEB dues and other administrative and technological issues relating to Government transactions. A one day interactive workshop on cash management was also organised by the Reserve Bank on August 2, 2003 for the benefit of the State Government officials.

Technical Advisory Committee

11.40 During 2002-03, two meetings of the Technical Advisory Committee (TAC) were held in July 2002 and June 2003. Apart from the general market developments, some specific issues discussed during the 15th meeting of the Committee related to : extension of facility to gilt account holders, screen based trading in Government securities through exchanges, review of the Liquidity Adjustment Facility (LAF) and re-examination of the scheme of non-competitive bidding facility. In the 16th meeting of this Committee held on June 10, 2003, the issues pertaining to introduction of 'when issued market', interest rate derivatives, report of the Interdepartmental Group on Forward Sale of Securities acquired under OMO, capital indexed bonds, introduction of 28-day Treasury Bills and retailing of government securities were discussed.

Outlook

11.41 The conduct of debt management continues to be driven by the objectives of reducing costs and elongating maturities while ensuring the smooth completion of the Centre's and States' borrowing programmes. The process of debt consolidation and efforts at enhancing the benchmarking of securities would be persevered with. Undue elongation of the maturity profile could increase interest rate risks. Accordingly, the issue of capital indexed and more floating rate bonds are under active consideration. It is expected that stripping of government securities will be operationalised after the Government Securities Act is passed in the Parliament. In the case of Treasury Bills, as in the past, the amounts offered in the auctions would be modulated keeping in view the liquidity conditions. In the secondary market, measures like rollover of repo and operationalisation of DVP III settlement system, measures to further develop the retail market for government securities using the PD network and banks would be accelerated. The Reserve Bank would develop the debt markets further through over the counter (OTC) as well as exchange traded interest rate derivatives (interest rate futures trading has commenced since June 24, 2003). Efforts are underway to introduce interest rate options on exchanges, broaden the eligible underlying to other items in the balance sheet for hedging through derivatives and permit market making to those banks that have the required risk management capabilities. Initiatives are being taken to harmonise regulations in respect of OTC derivatives with exchange traded interest rate derivatives.