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Informist, Friday, Feb. 21, 2025

 

--Govt source: May ask 16th fin panel to nudge state for better cash mgmt

--Govt source: Fin panel may formulate guidelines on efficient cash mgmt

 

By Krity Ambey and Sagar Sen

 

NEW DELHI – The Centre wants state governments to follow its lead and implement more efficient cash management practices, and is looking to rope in the 16th Finance Commission to give them a nudge in this regard, a senior finance ministry official said. The Centre plans to urge the panel to delineate a comprehensive set of guidelines on the subject when it lays out its recommendations for states, the official added. 

 

Cash management has gained much importance over the last one year as the Centre looks to cut back on interest costs for shoring up its debt sustainability metrics, which are key to India's ambitions of a sovereign ratings upgrade. However, the Centre does not have complete control over its cash balances as these often reflect the surplus funds that state governments park in Treasury bills. Moreover, rating agencies view India's debt metrics at a general level, which take into account finances of both the Centre and states.

 

The central government will soon submit a memorandum of proposals to the 16th Finance Commission asking it to delve into the matter and to hold discussions with states to formulate the guidelines for efficient cash management practices, the official told Informist. The memorandum will also present the Centre's recommendation on sharing of taxes between the Union government and state governments. 

 

The 16th Finance Commission, led by former NITI Aayog vice chairman Arvind Panagariya, will submit its report in October. The panel's recommendations will outline the layout of the Centre-state financial dynamics for five years starting 2026-27 (Apr-Mar). 

 

None of the previous finance commissions have given recommendations pertaining to cash management. In fact, the matter is not within their purview, as the panel's main brief is to recommend the distribution of taxes between the Centre and states. It also recommends the principles governing grants-in-aid for state governments.

However, finance ministry officials are of the view that better cash management practices would help save up on interest costs, which in turn would free up funds for more productive expenditure. "It can also help us save some interest cost, and states should also deploy the funds towards capital expenditure which gives a better return," the official said. The interest paid by the Centre on funds that states invest in 14-day T-bills is two percentage points lower than the reverse repo rate.

 

The need for states to manage their balances more efficiently is evident from the fact that throughout FY25, states had an average of nearly INR 3 trillion deployed in T-bills. This sum directly translates into a cash holding for the central government. Economic Affairs Secretary Ajay Seth, in a post-Budget interview with Informist earlier this month, had underscored the need for leaner cash management, citing interest costs associated with bloated cash balances.

 

Better cash management by the governments can also help address liquidity constraints in the financial system, Seth had said. Since December, the banking system has been grappling with a liquidity crunch caused mainly by the Reserve Bank of India's dollar sales in the foreign exchange market.  End

 

 

Edited by Tanima Banerjee

 

 

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