State governments should be allowed to access markets directly for their borrowing requirements. Like the Centre, each state must decide its annual borrowing programme, said the chairman of the economic advisory council, C Rangarajan.
Rangarajan was speaking at the 16th bi-annual conference of the state finance secretaries in the Reserve Bank of India in Mumbai on Friday.
The overall limit to their annual borrowing from all sources should be supervised by an independent body like a loan council with representatives from the ministry of finance, planning commission, Reserve Bank of India, and the state governments, said the chairman.
He emphasised that the restructured public finance would result in increase in aggregate saving rate as well as in aggregate investment so that growth is stabilised at above 7 per cent.
Describing the role of the council, he said that it would, at the beginning of each year, announce borrowing limits for each state, taking into account the sustainability considerations into account.
Rangarajan said the states should decide their annual borrowings programme within the framework of their respective fiscal responsibility legistations and added that if the state governments move on the path of fiscal correction, their market borrowings programme would be sustainable and would not face difficulties in terms of getting the necessary subscription.
The twelfth finance commission has recommended a scheme of debt relief, which is in two parts, said Rangarajan. First, there is the relief that comes from consolidating the past debt and rescheduling it, along with interest rate reduction.
The second part consists of a debt write-off, which is linked to the reduction in the absolute levels of revenue deficits. Both relief will be available, only if states enact appropriate legislations to bring down the revenue deficit to zero by 2008-09 and commit to reducing the fiscal deficit in a phased manner.
With the relief that has been recommended, it should be possible for states to pursue their developmental goals with fiscal prudence.
The condition imposed also mitigates the moral hazard problem, he added.
© 2025