The fiscal responsibility and budget management (FRBM) review committee has recommended a debt to gross domestic product (GDP) ratio of 60 per cent for general government by 2023 (40 per cent for the Centre and 20 per cent for state governments). It has also recommended a fiscal deficit target of five per cent, to be divided equally between Centre and states.
But, with state borrowings already at 21 per cent in FY17, the burden of cutting general government debt falls squarely on the Centre. The Centre’s borrowing were 49.4 per cent in FY17. This needs to be brought down to 40 per cent.
And, rather than declining, the committee expects state debt to rise in the short term to 22.34 per cent by FY21, and then decline to 21 per cent by FY25.
But, this reduction in debt assumes that the liabilities arising from the states’ participation in Uday will not be more than two per cent of GDP and that states are able to cut their fiscal deficit by 0.16 per cent each year. There is reason for concern on both issues.
The report points out that Uday may have a significant impact on the liabilities and revenue expenditure of the states. State governments have also signalled their concern. “The states mentioned that apart from the higher debt burden, Uday will raise states’ revenue expenditure on account of interest payments on the newly acquired discom debt,” says the report. Further, a report by HDFC projects state deficits to rise to 4.1 per cent of GDP in FY18, up from 3.5 per cent in FY16, if one includes Uday. Excluding Uday, these are expected to rise to 3.2 per cent in FY18.
A consistent reduction in state fiscal deficit also seems unlikely if recent trends are anything to go by.
According to HSBC Global research, against a budgeted fiscal deficit of 2.6 per cent in FY17, the fiscal deficit rose to 2.8 per cent. In FY18, too, HSBC expects slippages on account of salary revisions after the 7th pay commission.
The committee also expects pay revisions to impact the deficit. “We conclude that states which have successfully maintained fiscal consolidation will be able to absorb the impact of additional expenditure on pay, allowances and pensions (PAP) and the fiscal stress on them in so doing would not exceed that faced by the Government of India,” says the report.
This implies that in the short term, the burden of cutting public debt falls on the Centre. The committee has recommended the Centre bring down its debt from 49.4 per cent in FY17 to 38.7 per cent in FY23. But there seems to be a difference in the numbers put out by the report and those mentioned in the Budget. In the FY17 Budget, the Centre’s debt was at 46.7 per cent of GDP (revised estimates).
The committee has also recommended that the Centre bring down its deficit to 2.5 per cent by FY23. With total household savings at 10 per cent of GDP, this implies that five per cent of these savings will be used to fund general government deficits. The balance will be available for funding investments.