RBI releases report of Working Group on State Government Guarantees

The Reserve Bank of India (RBI) on Tuesday released the report submitted by the Working Group on ``State Government Guarantees’’, a highly contentious issue being discussed across the country for the past several years

The major recommendations of the Working Group, constituted as per the decision taken by the 32nd Conference of State Finance Secretaries held on July 7, 2022, against the backdrop of a strong dispute between the Centre and a few State Governments over the latter's guarantee given to the borrowings of their PUSs and other institutions, are:

The word ‘Guarantee’ should include all instruments which create an obligation, contingent or otherwise, on the part of the State Government.

The purpose for which Government guarantees are issued should be clearly defined.

State Governments may consider fixing a ceiling for incremental guarantees issued during a year at 5 percent of Revenue Receipts or 0.5 percent of Gross State Domestic Product, whichever is less.

State Governments may consider charging a minimum guarantee fee for guarantees extended and additional risk premiums may be charged based on the risk category and the tenor of the underlying loan.

State Governments may publish/ disclose data relating to guarantees, as per the Indian Government Accounting Standard (IGAS).

The central bank expects that the implementation of the recommendations made by the Working Group would facilitate better fiscal management by the State Governments.

The Working Group comprised members of the Union Finance Ministry, Comptroller and Auditor General of India, and Some of the State Government. The terms of reference of the Working Group included, inter alia, prescribing a uniform guarantee ceiling for the States; a uniform reporting framework for the guarantees given by the State Governments; assessing the adequacy of states’ contribution to the Guarantee Redemption Fund, etc

The recommendations will land Kerala, which has been strongly opposing the Centre’s diktat on State Guarantee, with difficulties as it has given guarantee to the various debt instruments availed by the State PSUs and other institutions, especially Kerala Infrastructure Investment Fund Board (KIIFB), and Kerala State Social Security Pension Ltd ( KSSP), two much-hyped organizations launched by the first Pinarayi government. The government has stood guarantee to borrowing of them and in several cases, the State had avoided the word ``guarantee’’ for not mentioning them in its budget. The State argues such guarantees should not be considered as its liabilities.

The Centre is very much adamant on its stand that any guarantee given by the State is its liability and hence would be deducted from its borrowing limit.