Money > Budget > Budget News & Analysis JANUARY 28, 2002 | 12:30 IST rediff.com
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External aid may be taken off Budget

P Vaidyanathan Iyer

The government is exploring the possibility of creating a special purpose vehicle or an arrangement outside the Budget for receipt and disbursement of external aid. This could be on the pattern of small savings arrangements and could serve to push up greater utilisation of external aid without pushing up the fiscal deficit.

According to senior government officials, both grants and on-lending of loans taken for a project in states should be strictly transferred on a back-to-back basis with the states being asked to bear the cost of rupee depreciation, currently borne by the Centre.

States can, however, take full advantage of the original terms and conditions of the loans in terms of maturity and interest rate, they said.

Officials said the process could be initiated in the Tenth Plan and reviewed after three years. An arrangement could be worked out with the Reserve Bank of India wherein the states sign individual memoranda of understanding with the apex bank for bearing the full exchange risk, they added.

The present concessional assistance mechanism has led to non-utilisation of highly concessional International Development Agency loans.

For instance, in 2001-02, while the available IDA credit was US $ 1.67 billion, a bulk of it $ 1 billion remained unused, as per official figures.

Officials said though the cost of funds for the states would go up if external aid is transferred on a back-to-back basis, it would not necessarily result in less demand for such loans.

On the other hand, it could spur competition among the states. Also, the financial position of most states having deteriorated in the last 3-4 years, they would require more financial resources for economic growth, they added.

As far as the grants were concerned, these should be passed on to the states on original terms. Converting grants into loans and then on-lending them to states did not go well with the external creditors, the officials said.

Although external assistance has built-in advantages of providing a long term and stable flow of resources, sources said it played only a marginal role in the overall profile of finances for the plan. While highly concessional assistance like the IDA are likely to be phased out in the next three years, most aid comes from the World Bank and Asian Development Bank which in the near future would be almost as costly as domestic borrowing, they added.

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