Twelfth Finance Commission (TFC) has recommended a two fold strategy for fiscal consolidation and elimination of revenue deficit of the States.

  • Central Loans to States contracted till March, 31, 2004 and outstanding on March 31, 2005 may be consolidated and rescheduled for a fresh term of 20 years (resulting in repayment in 20 equal installments) and an interest of 7.5 percent be charged on them.
  • The general debt relief, as stated above, comprising consolidation, reschedulement and lowering of interest rate shall be available to the States with effect from the year they enact Fiscal Responsibility and Budget Management legislation which shall contain some core elements as recommended by TFC.
  • TFC has also framed a scheme of debt waiver based on fiscal performance linked to the reduction of revenue deficits and control of fiscal deficit of the States. The quantum of debt write-off of the repayment will be linked to the absolute amount by which the revenue deficit is reduced in each successive year during the TFC award period from the base level of revenue deficit compiled by TFC. In effect if the revenue deficit is brought down to zero, the entire repayments during the award period of TFC will be written off.
  • Govt. of India have accepted the recommendations of TFC and framed a Guidelines on the States' Debt Consolidation and Relief Facility (2005-06 to 2009-2010). The Guidelines have been issued to the States on 23rd June, 2005.
  • The process of implementation of the Scheme will be as follows:
    • Enactment of Fiscal Responsibility & Budget Management legislation by the States.
    • Finalisation of actual outstanding loans given by MoF and reconciling the same with State Govt. and AGs.
    • Consolidation of Loans.
    • Drawing up of States' own Fiscal Correction Path and signing a letter of commitment.
    • Examining the claim of the States together with finalisation and review of the States' own Fiscal Correction Path by the Central Monitoring Committee.
    • Approval of the amount of debt waiver by Secretary (Expenditure) and issue of waiver order.

Government of India
Ministry of Finance
Department of Expenditure
(Fiscal Reforms Unit)

North Block,
New Delhi -110 001
Dated, 11th August , 2005.