The fiscal conditions among states in India are showing warning signs of building stress, with a Reserve Bank of India article identifying Bihar, Kerala, Punjab, Rajasthan, and West Bengal as highly distressed States among 10 States with the highest debt burden, going by the debt/ GSDP ratio.
The slowdown in own tax revenue, a high share of committed expenditure and rising subsidy burden have stretched state government finances exacerbated by Covid-19, per the article “State Finances: A Risk Analysis”, put together by seven senior RBI officials.
For the five most indebted States, the debt stock is no longer sustainable, as the debt growth has outpaced their GSDP growth in the last five years, cautioned the authors.
New source of risks
New sources of risks have emerged – relaunch of the old pension scheme by some states; rising expenditure on non-merit freebies; expanding contingent liabilities; and the ballooning overdue of DISCOMs (power distribution companies) - warranting strategic corrective measures, they said.
Stress tests show that the fiscal conditions of the most indebted state governments are expected to deteriorate further, with their debt-GSDP ratio likely to remain above 35 per cent in 2026-27, according to the article.
Based on the debt-GSDP ratio in 2020-21, Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana turn out to be the states with the highest debt burden, the authors said.
“These 10 States account for around half of the total expenditure by all State governments in India. Other vulnerability indicators also capture these 10 States in their cross hairs.
“Their GFD-GSDP ratios were equal to or more than 3 per cent in 2021-22, besides deficits in their revenue accounts (except Uttar Pradesh and Jharkhand),” assessed the authors in RBI’s latest monthly bulletin
IP-RR ratio
Moreover, the interest payment to revenue receipts (IP-RR) ratio, a measure of debt servicing burden on States’ revenues, in 8 of these states was more than 10 per cent.
Among the 10 states, Andhra Pradesh, Bihar, Rajasthan and Punjab exceeded both debt and fiscal deficit targets for 2020-21 set by the 15th Finance Commission (FC-XV), the article said.
“Kerala, Jharkhand and West Bengal exceeded the debt target, while Madhya Pradesh overshot the fi scal deficit target. Haryana and Uttar Pradesh were exceptions as they met both criteria.
“Rajasthan, Kerala and West Bengal are projected to surpass the FC-XV targets for debt and fiscal deficit in 2022-23 (Budget Eestimate/BE),” RBI officials said.
As a corrective measure, the State governments must restrict their revenue expenses by cutting down expenditure on non-merit goods in the near term, suggested the authors.
In the medium term, these states need to put efforts towards stabilising debt levels. Further, large scale reforms in power distribution sector would enable the DISCOMs to reduce losses and make them financially sustainable and operationally efficient.
In the long-term, increasing the share of capital outlays in the total expenditure will help create long-term assets, generate revenue and boost operational efficiency, opined the authors.
Alongside, State governments need to conduct fiscal risk analyses and stress test their debt profiles regularly to be able to put in place provisioning and other specific risk mitigation strategies to manage fiscal risks efficiently.