Amid Freebie Promises, RBI Proposes Overhaul Of State Government 'Guarantees' For Improving Fiscal Responsibility

The Reserve Bank of India (RBI) in its latest report has proposed significant changes in the issuance of state government guarantees to enhance fiscal responsibility.

The recommendations come from a working group on state government guarantees and aims to provide a framework for better fiscal management.

The key proposal suggests a broadened definition of the term 'guarantee' to include all instruments that create an obligation, contingent or otherwise, on the part of the state government.

As reported by Indian Express, this change intends to bring more clarity and inclusivity to the guarantee process.

To curb unchecked guarantees, the RBI suggests clearly defining the purpose for government guarantees and recommends that state governments consider imposing a ceiling on incremental guarantees issued annually.

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This ceiling, either 5 per cent of revenue receipts or 0.5 per cent of gross state domestic product, aims to regulate the extent of guarantees provided.

An additional noteworthy recommendation involves introducing a guarantee fee.

The report suggests states charge a minimum guarantee fee for extended guarantees, with an additional risk premium based on risk category and tenor.

These fees are anticipated to instill financial responsibility in the guarantee process.

Furthermore, the report advises against providing government guarantees to private sector entities without specifying pre-conditions.

In terms of transparency, the report underscores the importance of states publishing or disclosing guarantee-related data following the Indian Government Accounting Standard.

These recommendations are crucial, especially amid electoral promises of freebies, and are expected to foster better fiscal management, instill discipline in guarantee issuance, and promote responsible fiscal behavior among states.

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