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FMs dilemma over States demand for interest cut on borrowings from N

Written by: Staff

New Delhi, Feb 26 (UNI) A peculiar dilemma confronting Finance Minister P Chidambaram in his Budget 2006-07 is the clamour of States governments this year for a cut in the rate of interest at which they borrow money from small savings schemes.

Millions from the middle class put their monies in such schemes, which includes Public Provident Fund, National Small Savings Certificates and Kisan Vikas Patra. These are administered by the Central government and States can borrow 75 per cent of the these aggregate funds from the National Small Savings Funds (NSSF) at a nine per cent rate of interest.

The Centre pays upto 8 per cent average return to investors, but the offtake from NSSF by states has been slow as they can borrow at a cheaper rate from the market. Schemes like Senior Citizens Income Plan entail even a higher rate of return of nine per cent.

States point out that their average cost of borrowing from the market is 7.6 per cent, far lower than the cost of borrowing from the NSSF. The States are demanding that they be allowed to raise money far more frequently from the market, a step that the Centre will find it difficult to concede as excessive borrowings by State governments would crowd out private investments.

Mr Chidambaram's decision to go with the demand of the States is further confounded by the Left parties, who are supporting the UPA government, asking for an upward hike in interest paid to investors in the scheme.

If the Finance Ministry has to reduce the interest rate on NSSF borrowings by States it would be natural for it to reduce its borrowing rate.

Another factor which had weighed on the Finance Minister is the fact that lending rates by Public and Private Sector Banks are set to harden in the face of inflationary pressures and the recent pre-emptive decision by the RBI to hike by 25 bps Repo and Reverse- Repo rates.

The argument of the State governments gets a shot in the arm that while the cost of administration for managing the funds of the small savings schemes of the Centre is one per cent, that of the banks is only half of this.

The Centre, however, maintains that the figure of one per cent is not correct.

As the choice for Finance Minister is tough and likely to have a political fallout, a final decision will have to be taken at the Prime Minister's level.

Mr Chidambaram appears to have found a way out and is likely to announce in this year's Budget a proposal to allow States to utilise National Small Savings Funds (NSSF) for financing projects earmarked for Externally Aided Projects (EAP).

The bailout is necessitated because of the constraints of providing funds by the Finance Ministry and Planning Commission regarding total allocations to the States and the Centre.

Informed sources say that with the total Gross Budgetary Support (GBS) fixed at only Rs 1,71,000 crore for the next fiscal, the Finance Ministry has not allocated any funds for EAPs, which are mainly funded from Budgetary Support and estimated at Rs 5,000 crore. These are proposals which are in an advanced stage of clearance.


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