RBI Cites Example Of Odisha Government In Fiscal Risk Management

Bhubaneswar: The Reserve Bank of India (RBI) has praised the fiscal management of Odisha government and cites its example on measures to mitigate fiscal risks arising out of amortisation of the open market borrowing and foreign currency fluctuation.

In its report on “State Finances”, the RBI has stated that the Odisha government identified fiscal risk management as one of the key reforms priority under technical assistance from the IMF’s South Asia Regional Training and Technical Assistance Centre (SARTTAC) in 2019.

The state government adopted a three-stage approach in this regard. Those are identification and measurement of fiscal risks; fiscal risk reporting; and mitigation and management of fiscal risk.

It identified all possible sources of fiscal risk and worked out the impact of each fiscal risk as ratio of GSDP. The risks were classified as high, medium and low on the basis of the level and possibility of occurrence.

The government identified the following sources of fiscal risk:

(a) Macroeconomic performance, international commodities prices, and exchange rate risk, particularly for foreign currency loans

(b) Natural disaster to which Odisha is prone

(c) Composite debt risk measured through a debt index consisting of debt to GSDP ratio, per capita debt and cost of debt using the relative distance methodology

(d) Overall fiscal risk measured through a fiscal performance index employing a multiple indicator approach

(e) Contingent liabilities Ask from Guarantees, Public Private Partnerships (PPPs)’9, and public sector undertakings (PSUs).

The state government also set up a dedicated Fiscal Risk and Debt Management Cell in the Finance Department and a high-level Fiscal Risk Committee. The committee headed by the Secretary, Finance has already put in place mechanisms for management and mitigation of some of the major fiscal risks such as creation of State Disaster Response & Mitigation Fund (SDRMF), an administrative ceiling on government guarantees and constitution of a Guarantee Redeption Fund (GRF) for the fiscal risks arising from government guarantees and institution of a Consolidated Sinking Fund (CSF).

Over the years, the state government has built up a sizeable CSF (about 15% of its liabilities) and GRF (about 25% of total guarantee exposure).

As a part of fiscal risk management for COVID-19 crisis, the state would utilise a portion of the CSF for amortisation of the entire open market borrowing during 2020-21. The state intends to broad-base coverage of these funds and use those to address likely fiscal stresses in future.