Centre links rate relief on small savings loans to states to fiscal discipline

States which are not adhering to the financial discipline will have to pay higher interest on National Small Savings Fund (NSSF) loans from the next fiscal.

The union cabinet today approved a proposal of the finance ministry to withdraw the reduced interest rate of 9 per cent in respect of NSSF loans in case a state deviates from the Fiscal Responsibility and Budget Management (FRBM) targets of the state and to restore the original interest rate from the year 2012-13. The state government can revert to 9 per cent interest rate once it starts complying with the FRBM targets.

The state will be considered eligible for relief measures recommended by the 13th Finance Commission on NSSF loan from the date of FRBM Act is amended/enacted in accordance with the recommendation of the 13th Finance Commission.

In addition, from the year 2012-13, the debt relief recommended by 13th Finance Commission will be allowed to states based on the compliance to the fiscal targets in their respective FRBM Acts as reflected in their budget estimates of the year in which the relief is given.

The 13th Finance Commission has recommended providing debt relief to the states, inter alia, recommending that the interest rate of NSSF loans contracted by the states till 2006-07 and outstanding at the end of 2009-10, be reset at a common interest rate of 9 per cent in place of existing 10.5 per cent or 9.5 per cent. This debt relief is recommended to be available to states only if they amend/legislate FRBM Act in accordance with the recommendations of the commission. The cabinet had accepted these recommendations at its meeting held in February 2010.

While recommending the relief measure relating to NSSF loans, the 13th Finance Commission, however, has not set any conditionality with regard to compliance with the targets. However, the finance ministry has observed that continued compliance with FRBM targets is an important and also the huge NSSF deficits would be an implicit liability of the central government.