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Putting a leash on Govt guarantees

Shaji Vikraman

GOVERNMENT entities, who have long been used to borrowing from banks and the market comfortably on the back of Government of India (GoI) guarantees are finding the going tough, as they are up against some tight-fisted babus at North Block.

Any Government agency which seeks a guarantee for domestic borrowing is immediately handed out a form by the Finance Ministry, aimed at ferreting out information on several financial parameters. Unless the babus pronounce that they are satisfied with the financials of the applicant, a rejection slip is inevitable in most cases.

The few exceptions made have been for agencies such as the Nafed which has a price support scheme (PSS) and the Food Corporation of India (FCI) where the Central Government provides a guarantee to banks for the corporation's procurement operations. Other wise, in value terms, the guarantees furnished by the Government over the last year or so have virtually been small change, thanks to this stingy approach.

Now, with the outstanding aggregate guarantees of 17 major States topping the Rs 1,05,000-crore mark by the end of March 2000, the warning bells have started ringing. The Government has acknowledged this by quietly setting up the Guarantee Redemption Fun d last year. Government officials do not want to publicise the fear that several bankers led by the State Bank of India, who have given guarantees worth crores to PSUs, may end up knocking at their doors.

The plan now is to tighten the act even more after the fiscal responsibility and the budget management Bills are passed by Parliament. States can expect a knock on their knuckles and some sermons on fiscal discipline from Delhi after this.

The Reserve Bank of India, to quote its officials, has also sought to sensitise the States on this issue. Although a technical committee of a few finance secretaries of State Governments had made major recommendations on this including a proposed ceiling on guarantees and constitution of a contingency fund for guarantees, not many have responded.

Rajasthan has made a start by setting up a Guarantee Redemption Fund while some other States have moved to impose ceilings on guarantees by enacting legislations. The list of States which have thus put caps on guarantees include Gujarat, Karnataka, Sikki m and Assam.

The Fiscal Responsibility Bill has also sought to impose a ceiling on contingent liabilities. It cannot exceed 0.5 per cent of the GDP. This includes both external and internal contingent liabilities. Obviously, in this cap of 0.5 per cent, the proportio n of guarantees for external loans will be higher as

the multilateral agencies provide funds only on the strength of the GoI guarantee.

However, given the state of finances in the country, the Central Government has started vetting the accounts of States, prior to negotiations for World Bank loans. Kerala realised this recently to its dismay when it dealt with the Finance Ministry for a loan from the Asian Development Bank.

The new Chief Minister, Mr A.K. Antony, on his first trip to Delhi after taking over, made a pitch to the Finance Minister, Mr Yashwant Sinha, to help out the State on this.

But as the Chief General Manager of RBI, Ms Usha Thorat, made the point recently here, there are other items of contingent liabilities which also need to be looked at. These include inadequately funded pay-as-you-go pension schemes with assured returns, liabilities of loss-making State enterprises and the recapitalisation needs of State-level financial institutions.

The Government has set its mind on addressing the pension liabilities. But a turf battle within the Finance Ministry may slow down the process.