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Govt likely to review small savings schemes

P Vaidyanathan Iyer in New Delhi | October 06, 2003 07:51 IST

The government is planning to review the small savings schemes and also to consider a cut in the small savings loans to states in a move that will have far-reaching consequences on state finances.

According to senior finance ministry officials, a sharp rise in such loans to states and an unabated growth in small savings are perhaps the most destabilising factors in their finances.

In the last 10 years small savings loans to states grew 12-fold and are expected to top Rs 61,000 crore (Rs 610 billion) in the current fiscal.

The officials pointed out that the debt and guarantees of all states put together had reached an unsustainable 35 per cent of the country's gross domestic product by the end of 2002-03.

While the total outstanding debt of the states stood at Rs 6,71,653 crore (Rs 6,716.53 billion) in 2002-03, or 29.8 per cent of the GDP, the guarantees stood at Rs 1,66,116 crore (Rs 1,661.16 billion), or 7.2 per cent of the GDP.

To correct the debt overhang, there was urgent need to cut Plan borrowings as well as small savings loans to states, the officials said.

While sequestering 30 per cent of the states' annual small savings accretion under the debt swap did help in containing their debt, there is a serious need to review the scheme itself, they added.

To prudently use small savings, the finance ministry is planning to ask states to earmark another 5 per cent of the annual accretion towards a sinking fund that can function as a lender of the last resort if states default on their guaranteed borrowings.

The Centre plans to chip in with Rs 1,000 crore (Rs 10 billion) initially for the fund's corpus, which will be beefed up by states over the next three years.

The Centre had in the Budget for 2002-03 decided to pass on all small savings loans to the states. Till then, 80 per cent of these loans were available to them.

A cut in small savings loans can be undertaken either by asking the states to set aside higher percentages of such loans for prudent debt management, or if need be, by effecting a direct cut.

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