With the government able to borrow funds at less than 6 per cent, the finance ministry is likely to reduce the interest rate on central loans to states by 50-100 basis points in the forthcoming Budget. At present, central loans to states carry an interest rate of 10.5 per cent. 
 
According to finance ministry sources, states should also reap the benefits of the soft interest rate regime. 
 
The Centre has progressively been able to reduce its cost of borrowings over the last 3-4 years. In 2003-04, the weighted average cost of new issuances by the Centre has dropped over 150 basis points from 7.34 per cent in 2002-03 to 5.71 per cent. 

• Budget 2004-05: Complete Coverage

A 100 basis points cut in the central loans to states, together with the swap of high-cost debt with low-cost debt, will mitigate their financial woes to some extent. 
 
For the fiscal 2004-05, the outstanding central loans to states is estimated to be Rs 2,05,485 crore (Rs 2,054.85 billion). In 2003-04, it stood at Rs 1,93,033 crore (Rs 1,930.33 billion). 
 
The ministry has progressively reduced the interest rate on central loans to states over the years from a high of 14 per cent to 10.5 per cent now. But it is still a far cry from the cost of funds for the Centre, which has plummeted over the last 2-3 years to less than 6 per cent. 
 
Primary dealer PNB Gilts says that the weighted average cost of outstanding central government issues too has dropped over 100 basis points to 9.3 per cent during 2003-04, compared to 10.44 per cent during the previous fiscal. 
 
The sources said that the ministry would continue with the debt swap scheme initiated two years ago. 
 
In the current fiscal, states would be replacing Rs 35,000 crore (Rs 350 billion) to Rs 40,000 crore (Rs 400 billion) of their outstanding high-cost debt, which carries an interest rate of 13 per cent and above. 
 
Besides allowing states additional market borrowings during the fiscal, the ministry would also set aside 40 per cent of their small savings collections during the fiscal towards the debt swap scheme. 
 
The sources said the Rs 100,000 crore (Rs 1,000 billion) debt swap scheme, spread over three years, would result in savings of as much as Rs 81,000 crore (Rs 810 billion) over the remaining maturity of high-cost debt.

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