# 2.4 _Quasi-Fiscal Issues_

In addition to the deterioration in “explicit” public finances, quasi-fiscal activities have become a growing threat since the mid-1990s. These may be grouped into three categories: losses associated with off-budget activities, notably, supply of irrigation and power; contingent liabilities, which may either be explicit, e.g., guarantees of bonds issued by loss-making public enterprises; or implicit, e.g., financial sector bailout costs resulting from implicit deposit insurance; and unfunded pension liabilities. These could be interrelated, e.g., the losses of State Electricity Boards (SEBs) may be financed by bonds issued with government guarantees.

SEB losses were estimated at Rs.332 billion in 2001/02, triple the level in 1996/97.<sup>25</sup> To put this in perspective, the gross fiscal deficit of the states was 4.4 percent of GDP in 2001/02, or about Rs.1183 billion, a number which included only a portion of the power sector loss, namely, Rs. 83 billion. If the full amount of the loss were included, the fiscal deficits of the states would rise by an average of 30 percent. Some states have started reporting their deficits with and without the loss of the respective SEB in recognition of the growing problem.

If SEB losses are explicitly included in the general government deficit, these would increase by a significant 1.0-1.5 percentage points of GDP, i.e., the gross fiscal deficit would be 11.5 percent of GDP instead of 10 percent. Such inclusion appears to be only a matter of time - the Ahluwalia Committee<sup>26</sup> recommended replacing past-due arrears of SEBs to central government agencies by state government bonds, while the tripartite agreement signed in March 2003 by RBI, state governments and Ministry of Power allows RBI to use amounts due to the states to settle any unpaid bills presented to the respective SEB by central agencies.

Guarantees have risen sharply after 1996, mostly in connection with borrowings by SEBs and special purpose vehicles (SPVs) established for large irrigation projects.<sup>27</sup> CRISIL estimates that of the market borrowings by state-level entities guaranteed between 1995-2002, Rs.440 billion will be called over the next five years. While this may not seem much, this estimate excludes guaranteed loans from banks/FIs such as NABARD, HUDCO, LIC, NCDC, REC, public sector banks and regional rural banks. Moreover, the guarantors themselves, i.e., the state governments, are already heavily indebted.

Financial sector bail-out costs have not so far been significant, unlike in East Asia and some of the transition countries of Central and Eastern Europe. Since 1992/93, relatively small amounts of money have been spent to assist nationalized banks, regional rural banks, UTI, IDBI and IFCI, with another 0.8 percent of 2002/03 GDP identified to help UTI, IFCI and IDBI . The banks’ reported gross non-performing loans (NPLs) were 10.4 percent of loans as of March 2002; net of provisions the figure was 5.5 percent; and net non-performing loans as a percent of assets were 2.3 percent or about 1.5 percent of GDP. While some financial analysts have suggested that NPLs are substantially understated by various “evergreening” methods, a doubling of the gross figure would put NPLs at less than 7 percent of bank assets, or about 4.5 percent of GDP. Another indicator of risk, lending for stocks, real estate, and commodities, is less than 4 percent of lending. While off-balance sheet operations are equal to nearly 60 percent of the balance sheet, three-fourths are forward exchange contracts (half by the foreign banks) mostly related to

> 25 Source: Planning Commission, Government of India: _Annual Report (2001-02) on the Working of State Electricity Boards & Electricity Departments_ , May, 2002.  The actual financial loss is even greater because of collection problems.

> 26 Report of the Expert Group, Settlement of SEB Dues, May 2001.

> 27 CRISIL (2002).

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