Plan panel working on States' problems over TFC

New Delhi, Oct 24: The Planning Commission is engaged in an intensive exercise, based on its interactions with the States on the problems emanating from recommendations of the 12th Finance Commission (TFC), with a view to work out a solution before the ensuing meeting of the National Development Council (NDC).

Plan panel sources said that a solution to these issues would be worked out before the Eleventh Plan is finalised by the NDC to be held in a month's time.

The NDC is being convened to approve the Approach Paper to the Eleventh Plan (2007-11). The Approach Paper recently got the nod of the Full Planning Commission.

The sources said borrowing by the States always required the Union Government's permission and access to market borrowing (SLR eligible bonds) was always strictly controlled. However, until recently there was no cap on total borrowings and States were encouraged to use borrowed resource, other than market borrowings to finance the Plan.

With the 12th Finance Commission linking debt re-structuring to the passage of Fiscal Responsibility and Budget Management Act (FRMBA) with a prescribed fiscal deficit as a percentage of GDP, the States now have a cap on total borrowings. This has raised some problems for the States, the sources said.

The States are of the view that the three per cent fiscal deficit limit was 'too inflexibile.' It has been argued that a higher fiscal deficit can be tolerated if the quality of the deficit is such as to encourage a higher rate of growth.

In general, States with a low initial debt ratio and high GDP growth can afford a higher fiscal deficit consistent with achieving the desired debt ratio in a given period.

The Commission is of the view that as it is not easy to determine state-specific limits, the Planning Commission could set up a Group to propose limit for each State, taking this problem into consideration.

State governments also feel that there was lack of clarity on the condition of eligibility for the write-off of as part of the debt service year by year. The sources said it was not clear whether this depends upon the fiscal deficit being at or below the nominal level of 2004-05 or whether it depends upon the fiscal deficit being held at three per cent of the State Domestic Product (SDP).

The sources said if eligibility was linked to the fiscal deficit being at or below the nominal level of 2004-05, then that is 'too stringent.' They are of the view that it would be desirable to link the write-off to the fiscal deficit as a percentage of SDP being at an approved level.

The sources added that the present practice of making the entire write-off dependent on whether the fiscal deficit criterion is met was highly restrictive. They said it would be more logical to reduce the write-off in a graduated manner depending upon the extent to which the fiscal deficit exceeds the target.

Another problem relates to Non-Restructuring of NSS debt. Several States have argued that NSS debt even after the creation of 'Bharat Kosh' should have been restructred. This was being examined by a Committee of the NDC.

A key problem concerning the State governments relates to treatment of Externally Aided Projects (EAPs) for Special Category States.

The government has accepted the 12th Finance Commission recommendations to change the earlier practice of external assistance being passed on in the form of rupee loans and grants (70:30 for non-special category states and 10:90 for special category states). Instead, new external assistance is passed on 'back to back' on the same terms as received, along with exchange risk.

The States have made two requests. The first relates to Special category states loosing out massively in this transition since what was 90 per cent grant now goes as concessional foreign exchange loan with exchange risk. And secondly, many non-special category States have expressed concern at beaing forex risk over a long period and have suggested that the Central government should offer forex hedges at a price.

The Commission is of the view that it may not be possible to have an official forex hedge window for the States as that would signal an official perception on exchnage rate movements.

However, there was a case for allowing Special Category States for continuing with their earlier arrangement regarding external assistance, the sources said.

UNI