At a time when diverse pressures are adding to fiscal stress, contingent liabilities of the central government, up 40 per cent between 2004-05 and 2010-11, has also come under a spotlight.
The fiscal policy strategy statement of Budget 2012-13 shows the stock of contingent liabilities in the form of government guarantees has increased in absolute terms from Rs 107,957 crore at the beginning of the Fiscal Responsibility and Budget Management (FRBM) Act regime in 2004-05 to Rs 151,292 crore at the end of 2010-11. As a percentage of GDP, however, it has gone down from 3.3 per cent in 2004-05 to two per cent in 2010-11.
Experts said the rise in the burden of the contingent liability should be seen in the context of the risk factor involved and the current situation is not worrisome.
Pronab Sen, principal adviser to the Planning Commission, said either way, in terms of percentage of GDP or real terms, it had gone down and there was nothing to worry. “The fact of the matter is very simple. The public sector undertakings (PSUs) have become much more capable. They can go and borrow without government guarantees now.”
The central government extends guarantees primarily on loans from multilateral and bilateral agencies, bond issues and other loans raised by PSUs and public sector financial institutions.
In 2010-11, the gross addition in guarantees was Rs 22,745 crore, amounting to 0.3 per cent of GDP — well below the mandated target of 0.5 per cent of GDP set under the FRBM Rules. Net addition in guarantees during the financial year was Rs 13,428 crore, amounting to 0.2 per cent of GDP.
The FRBM Act mandates the central government to specify the annual target for assuming contingent liabilities in the form of guarantees. The Rules prescribe a cap of 0.5 per cent of GDP in any financial year on the amount of guarantees the central government can assume in the particular financial year.
The government guarantee policy issued in 2010-11 enumerates the principles which need to be followed before new contingent liabilities in the form of sovereign guarantees are undertaken. These include assessment of risk and probability of devolvement, institutional limits on guarantees for limiting exposure towards select sectors and requirement of guarantee vis-a-vis other forms of budgetary support or comfort.
According to the finance ministry, additional measures to further streamline the process of assuming risk could include charging of risk-based premia, disincentive for wilful default, only part-sharing of risk by the government and insisting on guaranteed debt cost to be near the benchmarked government securities rate.