Presentation at Ministry of Finance, P.R. China-World Bank Summit on Subnational Debt Management and Restructuring, Nanning, Guangxi Province, P.R. China. October 22, 2015.

1. India: Restructuring Subnational Debt
Abha Prasad
Lead Debt Specialist
Macroeconomics and Fiscal Management Global Practice,
World Bank Group
Presentation at the Ministry of Finance, P.R.China-World Bank Summit on Subnational Debt Management and Restructuring,
Nanning, Guangxi Province, P.R. China, October 22, 2015.

2. Overview Reform Outcome
Structure

3. Three Phases of Subnationals’ Fiscal Performance
Pre-1998: “stable
fiscal indicators”
1998 to 2003: “fiscal slippage” 2004 onwards: “fiscal consolidation”
Measures taken:
National level
• 2003: Enactment of a Fiscal Responsibility and Budget Management Act
Subnational (States’) level
• 2004: 12th Finance Commission (12th FC) incentive schemes for Subnationals to initiate fiscal consolidation
Overview Reform Outcome

4. Two-pronged Approach to Reforms
Regulation
• Steps towards fiscal consolidation subnationals to:
• enact Fiscal Responsibility Legislation (FRL)
• eliminate revenue deficits by 2008-09
• reduce fiscal deficits to 3 percent
• set up guarantee redemption funds and sinking funds
Incentives
• Subnationals to:
• consolidate and reschedule outstanding loans to Centre (at lower interest rate),
subject to enactment of FRLs
• approach market directly for borrowings,
• Debt write-offs linked to reduction of revenue deficits
Overview Reform Outcome

5. Regulation
Fiscal Rules in Indian Subnationals
Subnational
Date of
enactment
Fiscal Targets
FD= fiscal or overall deficit
RD = revenue or current deficit
Caps on
Guarantees
Karnataka Sep-02 FD, RD & Debt Yes
Tamil Nadu May-03 FD & RD Yes
Kerala Aug-03 FD & RD No
Punjab Oct-03 FD, RD & Debt Yes
Uttar Pradesh Feb-04 FD, RD & Debt Yes
Gujarat Mar-05 FD, RD & Debt Yes
Maharashtra Apr-05 FD & RD No
Himachal Pradesh Apr-05 RD Yes
Rajasthan May-05 FD, RD & Debt No
Assam May-05 FD, RD & Debt Yes
Orissa Jun-05 FD, RD & Debt No
Tripura Jun-05 FD, RD & Debt Yes
Haryana Jul-05 FD, RD & Debt No
Madhya Pradesh Aug-05 FD, RD & Debt Yes
Manipur Aug-05 FD & RD Yes
Nagaland Aug-05 FD, RD & Debt Yes
Chhattisgarh Sep-05 FD & RD No
Andhra Pradesh Oct-05 FD, RD & Debt Yes
Uttarakhand Oct-05 FD, RD & Debt Yes
Bihar Feb-06 FD & RD No
Arunachal Pradesh Mar-06 FD & RD Yes
Meghalaya Mar-06 FD, RD & Debt Yes
Goa May-06 FD, RD & Debt Yes
J&K Aug-06 FD, RD & Debt Yes
Mizoram Oct-06 FD, RD & Debt Yes
Jharkhand May-07 FD, RD & Debt No
Source: Simone & Topalova, IMF (2009)
Overview Reform Outcome

6. Incentive: Debt Swap Scheme
Replaced high-cost debt of states with lower-cost borrowings, at market rates
• 20% of debt with interest rates >= 13% from Centre were prepaid
• Borrowed from market (rates averaged 7.5%)
• Also used low-cost borrowings from National Small Savings Fund
Result
– Interest savings of Rs.310 billion (US$7.1 billion)
– Saved 0.75 % in revenue per year (12th Finance Commission)
Debt outstanding remain unchanged, but servicing costs came down
Moved towards more transparent and market-based financing
Overview Reform Outcome

7. Incentive: Securitization “Power-Bonds”
• States issued “power bonds” to securitize losses of electricity utilities
– Almost 1.5% of GDP; Issued 15-year tax exempt “power bonds”
• Increased States’ liabilities by 22.8 percent during 2003–04 but subsequently several states pre-paid
• Efforts to contain moral hazard
• Announced as a one-time settlement measure
• Supplemented with reforms to ensure discipline going forward
• Participating states qualified for funds based on reform milestones and reduction of losses
Overview Reform Outcome

8. Continum: Reinforcing Incentives for Fiscal Discipline
13th Finance Commission (2012-15)
 Debt relief scheme extended to States that
had not availed
 Borrowing limits enforced by Centre based
on fiscal consolidation roadmap
14th Finance Commission (2015-20)
Continued the process
Ceiling on fiscal deficit/GSDP: 3%
 Additional borrowing of 0.25% allowed if
 Debt/GSDP ≤25%
 interest payment/revenue receipts ≤10
 Must have zero revenue deficit
Overview Reform Outcome

9. Key Deficit Indicators Pre- and Post-FRL
Non-special category states (NSC):
Group ‘A’ Top in real per capita incomes 2013-14 viz., Goa, Maharashtra, Haryana, Gujarat and Tamil Nadu.
Group ‘B’ Middle income states viz., Kerala, Punjab, Karnataka, Andhra Pradesh and West Bengal
Group ‘C’ Low income - Rajasthan, Jharkhand, Chhattisgarh, Madhya Pradesh, Odisha, Uttar Pradesh and Bihar.
----------------------------------------------------------------------------------------------------------------------------------------------
SC: Special category states: Arunachal Pradesh; Assam; Himachal Pradesh; Jammu and Kashmir; Manipur;
Meghalaya; Mizoram; Nagaland; Sikkim; Tripura; Uttara khand
----------------------------------------------------------------------------------------------------------------------------------------------
RD: Revenue deficit, GFD: Gross fiscal deficit, PD: Primary Deficit, GSDP: Gross state domestic product
Pre-FRL (1992-93) Post-FRL (2012-13)
Revenue Accounts
All 17 non-special category states had deficits 12 states recorded revenue surpluses
Gross Fiscal Deficit
15 states had fiscal deficits of over 3% Almost all lowered (even halved) fiscal deficits
Primary Deficit
Low income states had high primary deficit Most recorded surpluses
Deficit Indicators of States, Mean of Pre and Post FRL
Source: Reserve Bank of India, Study on State Finances, 2015
Overview Reform Outcome

10. Move to Market-Sourced Borrowing
Financing of Gross Fiscal Deficit: Less dependence on central loans
Source: RBI, Study on State Finances, several editions
Overview Reform Outcome

11. Decreasing Debt/GDP and Improved Liquidity Ratios
Source: Reserve Bank of India
Overview Reform Outcome
0
5
10
15
20
25
30
35
-1
0
1
2
3
4
5
Debt/GDPandIP/RR
GDF/GDPandRD/GDP
GFD/GDP RD/GDP Debt/GDP IP/RR
GFD=gross fiscal deficit; RD=Revenue deficit; GDP=Gross Domestic Product; IP=Interest
Payments ;RR=Revenue Receipts

12. Thank you