The finance ministry is set for a Rs 15,000 crore (Rs 150 billion) windfall in the current financial year, with 22 states agreeing to part with 20 per cent of their small savings under the debt-swap package.
According to senior finance ministry officials, North Block had set January 5 as the deadline for states to respond to its Rs 25,000 crore (Rs 250 billion) debt-swap proposal. "Apart from West Bengal, Maharashtra and Tamil Nadu, all the states have agreed," said a senior ministry official.
A buoyant small savings inflow this year - despite the cut in the small savings rate in the last Budget - came to the Centre's aid in persuading the states to part with 20 per cent of their corpus, or Rs 15,000 crore (Rs 150 billion), to pre-pay part of their high-cost debt.
The states will now be allowed to raise another Rs 10,000 crore (Rs 100 billion) through additional market borrowings at prevalent low rates of 7-8 per cent to replace their old debt.
The interest rates on the past debt of the states are as high as 13-14.5 per cent. Finance ministry officials estimate savings of as much as Rs 80,000 crore (Rs 800 billion) over 12 years if the states pre-pay high-cost debt to the tune of Rs 1,00,000 crore (Rs 1000 billion) in the next three-four years. The Rs 80,000-crore (Rs 800-billion) savings included principal pre-payment of Rs 43,000 crore (Rs 430 billion) and interest savings thereon of Rs 37,000 crore (Rs 370 billion), officials said.
In an attempt to urge the states further to implement the debt-swap package, the finance ministry has proposed that the Centre allow them extra market borrowings if they part with 30 per cent and 40 per cent of their small savings corpus in 2003-04 and 2004-05, respectively.
"The incremental market borrowings will be linked to their willingness to part with a larger percentage of small savings," said an official.
According to officials, while the Rs 15,000 crore (Rs 150 billion) pre-payment by states will be an additional receipt for the Centre, the amount is likely to be used to partly reduce the liabilities under the National Small Savings Fund. The fund, set up in 1999, was capitalised to the tune of Rs 1,80,000 crore (Rs 1800 billion) by issuing 11.5 per cent bonds in perpetuity.
"The Centre will not be short-sighted to use the receipts to show a lower fiscal deficit this year," said an official.
The debt-swap package was one of the last items on the agenda of Finance and Company Affairs Minister Jaswant Singh who had lobbied with the states during a meeting of chief ministers with Prime Minister Atal Bihari Vajpayee late last year.
While no final decision could be reached at the time, North Block was successful in driving home the point that states had a lot to gain if they accepted the package.