Debt on states much higher than centre, doubles in five years; these states hit most

The top 10 states accounted for around 72 per cent of the absolute debt of all states with Uttar Pradesh and Maharashtra being the states having the highest debt levels.

The state governments are sitting on a pile of outstanding debt, which has almost doubled in the last five years. Growing at CAGR of 14.3 per cent in the five years to FY20, the outstanding debt of all states stood at Rs 52.6 lakh crore, according to a report by Care Ratings. The top 10 states accounted for around 72 per cent of the absolute debt of all states with Uttar Pradesh and Maharashtra being the states having the highest debt levels. Uttar Pradesh had an outstanding debt of around Rs 6 lakh crore while Maharashtra had a debt of Rs 5 lakh crore.

The report also showed that out of the 30 states (including UTs), there are 18 states which have a debt to GSDP ratio of more than 25 per cent, 12 of which have the debt-GSDP ratio more than 30 per cent. Robust growth in the states’ market borrowings, funds raised by the state via UDAY bonds in FY16 and FY17, and higher growth in borrowings from banks and financial institutions are attributed to the increase in states’ outstanding debt in the last five years. In the same duration, the centre’s outstanding debt grew at  10 per cent while the ratio of state’s
outstanding debt to total internal debt increased from 30.9 per cent in FY15 to 35.1 per cent in FY20. 

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While the states are already struggling with their finance, the coronavirus pandemic has acted as a double-edged sword. The strict nationwide lockdown announced by Prime Minister Narendra Modi in the last week of March, and thereafter, the subsequent state-level lockdowns based on the regional health crisis, have emptied states’ revenues. To manage the finances, the states have resorted to front-loading of market loans (SDLs), borrowing Rs 1.93 lakh crores so far this year, which is 76 per cent higher than the corresponding period last year. 

Meanwhile, in the series of announcements made under PM Modi’s Atma Nirbhara Bharat package, Finance Minister Nirmala Sitharaman said that the centre would increase states’ borrowing limit from 3 per cent to 5 per cent for FY21. The government believed that the increased borrowings would give extra resources of Rs 4.28 lakh crore to states.