States’ repayment obligation multiplies

The repayment schedule of market loans has a bearing on the future volume of gross borrowings.

The repayment profile of state governments’ market borrowings raise concerns at a time when the Twelfth Finance Commission has recommended phasing out Plan loans from the Centre to states. Once Plan loans are phased out, states would have to resort to much greater borrowings from the market.

But by resorting to higher market borrowings, the state governments would be exposed to market discipline. Moreover, the quantum of future market borrowings by the states has to be consistent with the Gross Fiscal Deficit targets envisaged in their Fiscal Responsibility Legislations and would depend on their other sources of borrowings in the Consolidated Fund and the Public Account.

In 2003-4 and 2004-5, the open market borrowing programme of state governments had received a lukewarm response from investors.