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Assumption of state debtsIt is very important for us to first understand what is meant by assumption of debts? When any person, business unit or even country takes a loan, it becomes a debtor and the institution, person etc that has provided the loan becomes a creditor. The debtor is required to pay the loan back to the creditor as per the various terms and conditions regarding the loan. As far as the debt assumption is concerned, it involves three parties viz. debtor, creditor and the assumer. The assumer is also called as the new debtor because of the role assumed by it. The assumer or the new debtor takes up the liability of the original debtor to repay the loan. This is called as debt assumption. Thus, it can be rightly said that the debt assumption is a process by which an individual, company or institution takes up the responsibility of repaying the debts of another individual, institution etc. It is to be understood here that there are two simultaneous transactions that take place in case of debt assumption. The first transaction is regarding the debt obligation of the original debtor whereas the second transaction is about the creation of a new debt contract where the assumer agrees to pay the debt to the creditor. Let us now discuss the assumption of state debts.
ASSUMPTION OF STATE DEBTS
Many funds are required for the various types of development activities of the states in nation. The sources of fund for a state are the different types of revenues it collects from the people and various types of loans, grants etc that are provided by other states, countries and the international agencies. As far as the loans are concerned, these loans are generally provided by the center. But in some cases, the states take loans from different international financial institutions as well as other states to fund the developmental activities. These loans are required to be paid back. In cases where the loans are obtained from the international finance and development agencies, the central or the federal government provides the necessary guarantee. Even in case where a state obtains loan from any other state, the center provides the required guarantee. It has been seen in many cases that due to less revenue collection or because of natural disasters and calamities, a state is not able to repay the loan it has taken from the international agencies and other states. In such circumstances, the center has to intervene for resolving the dispute. Generally, these disputes are resolved by the center by assuming the debts of the state. Thus, it can be said that the assumption of state debts is done by the center to resolve the dispute and help the state is continuing the development activities. Let us now discuss the various aspects related to assumption of state debts.
VARIOUS ASPECTS RELATED TO ASSUMPTION OF STATE DEBTS
There are many aspects related to the assumption of state debts that need to be understood completely. First of all, why should a central or the federal government, like in the case of United States, should go for the assumption of state debts. The central or the federal government is the policy maker regarding the development of nation as a whole. There are many development activities that states are required to undertake on the part of central government. Though these activities are funded by the center, many times states require more funds for such activities. For fulfilling such needs, there are two ways. The first way is to get the required finance from the central government and the second way is to get it from the various international agencies. The central governments are quite interested in helping the states to go for the second way and thus, while doing so, they are required to provide the guarantee for the loans. In case the state is not able to repay the loan, the center assumes the debts of the state.
The other reason where the center assumes the debt of the states is that there are many development projects that are contentious between the states due to many factors. In such cases, one state undertakes the development project but when the other state does not repay the debt, which automatically gets created, the center has to assume to debts of state. The other aspect that needs to be understood here, that the practice of state debt assumption by the center is not very widespread. This is for obvious reasons. If the center keeps on assuming the debts of the states in all the cases, the states shall make it a convenient way of getting the debt from many international agencies and then getting the debt assumed by the center. Thus, central or the federal government does not provide financial support to a state until there is acute requirement. There are of course many cases where the central or the federal government has been liberal in assuming the debts of state. For example, in cases where the states are completely devastated by natural calamities and disasters like tornadoes, earthquakes etc, it is the role of center to provide all the necessary financial support and assumption of state debts is one of them. Not only center assumes the debts of state, but also it provides the necessary finance to put the state back on the track of development. In such circumstances, it is even desirable on the part of center to assume the debts of state.
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