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States to get Rs 1000-cr relief on interest burden

New Delhi, Sept. 7: With a view to improving state finances, the Centre today agreed to swap high cost debts worth Rs 25,000 crore with low cost securities by this fiscal.

Announcing the outcome of the state finance ministers’ conference here, West Bengal finance minister Asim Dasgupta told reporters that the proposal would provide Rs 1,000 crore relief to states on interest burden and were unanimous that the Centre should “improve upon it”.

“A scheme was worked out by the finance ministers on debt swaps and relief. Most states felt that the steps were not adequate. The Reserve Bank of India and the finance ministry will immediately sit down to improve upon the proposal,” Dasgupta said after the three-hour conference chaired by Union finance minister Jaswant Singh.

Of the Rs 25,000-crore debt to be swapped, Rs 15,000 crore is on account of small savings and the remaining for market borrowings by states.

“States, at present, pay an average 13 per cent interest on these securities and they wanted the new instruments to bear an interest of around 7.0 per cent,” he said.

States have a total debt outstanding of Rs 5,80,000 crore of which debts worth Rs 1,10,000 crore was taken up for the proposed swap in four years, Dasgupta said., Interest burden of states mounted to Rs 69,000 crore and the proposed Rs 1,000 crore relief was “inadequate”, he added.

Elaborating on the debt scheme, expenditure secretary C.S. Rao said “the Centre was not asking for any premium for retiring the high cost debt unlike banks and FIs.”

Rao also asserted that the debt relief to states would not affect fiscal deficit of the centre as the high cost debt was mainly from small savings schemes.

At present, states are given 80 per cent of the collection from small savings. The loans bear a high interest rate of about 14-14.5 per cent.

Dasgupta said the Centre has proposed that it would transfer 70 per cent of the small savings to states, as part of the debt relief scheme.

The other issues that were taken up by the finance ministers include arming states with additional powers of taxation, on which there was consensus.

The states also wanted that the Centre allow them to impose service tax on certain items and work out mechanism to transfer some revenue collected from the services on which centre levied the tax.

The modalities on the service tax and the legislations would be worked out by the high-powered committee on state finances, Dasgupta said, adding they would be ready before the meeting of the Prime Minister with state chief ministers next month.

The third major issue taken up by the finance ministers was the fund transfer of centrally sponsored schemes to state, Dasgupta said.

“When the funds are transferred to the states, it is not going into the consolidated fund of the states. Instead it goes to banks and institutions making the monitoring difficult,” he said.

The state finance ministers also discussed the issue of reducing non-plan expenditures like dearness allowances, bonus and lowering of retirement age, but left the matter to be resolved during the meeting with the Prime Minister.

The ministers also adopted a resolution on the Supreme Court judgement on sub-judiciary of states and authorised the Centre to impress upon the court the serious difficulty it might pose on constitutional, fiscal and administrative matters of states.

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