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Policy innovation

LiveMint logoLiveMint 30-03-2017 Livemint

The lukewarm response to the innovative attempt by Maharashtra to refinance its loans does not mean that the idea is a bad one. The state has said it will use its surplus cash to buy back expensive debt and follow up by refinancing it from the market at lower interest rates. As reported in this paper on Thursday, only a tenth of the debt that was to be bought back was offered by investors.

Falling interest rates are usually a good time for borrowers to refinance. What is true of the private sector is true of the public sector as well.

The most successful example of this continues to be the debt swap offered by the central government for two years beginning fiscal year 2003. States prepaid Rs1.06 trillion of expensive loans contracted from the central government and exchanged them for low coupon bearing small savings and open market loans.

The deterioration of state finances over the past two years means that such innovative policy solutions could once again become part of the discourse.

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