0 Comment(s) *
* The moderation of comments is automated and not cleared manually by indianexpress.com.
A recent study by economists at the Reserve Bank of India notes that 10 states have the highest debt burden. Over the past few years, much of the discussion on public finances in India has revolved around the fiscal stress at the level of the central government. However, state government finances have also been under pressure. Their space to manoeuvre has been restricted by slowing revenues, a rising share of committed expenditure and higher outgoes on subsidies. Unless the GST Council decides otherwise, they will witness a further fall in revenues once the compensation period draws to a close. A recent study by economists at the Reserve Bank of India notes that 10 states — namely, Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana — have the highest debt burden. Of these, the five most fiscally stressed are Bihar, Kerala, Punjab, Rajasthan and West Bengal. All these states have a debt to GSDP ratio in excess of 30 per cent.
A high debt level translates to higher interest payments. According to the report, the share of interest payments in revenue receipts exceeds 20 per cent for most of these states. Coupled with allocations for pension and administrative payments, the share of committed expenditure for these states is at least 30 per cent of revenue expenditure. With such a large share of their expenditure firmly earmarked, it restricts the fiscal space to spend on more productive avenues. States have also ramped up spending on subsidies. While a distinction needs to be made between merit and non-merit subsidies, politically motivated decisions such as providing free electricity or waiving of outstanding utility bills, profligate from a fiscal view, will aggravate the stress, and distort the functioning of the market. The failure to turn around the financial position of power distribution companies and opting out of the new pension scheme — Rajasthan and Chhattisgarh have recently done so — will only exacerbate the situation.
Over the past few years, some states have also been pushing part of their borrowings off budget, circumventing their ceilings. While there is little clarity on the extent of these obligations, the central government has now taken cognisance of this. It has recently asked states to bring on its books all off-budget borrowing undertaken over the past two years. This will bring about much needed transparency in state finances, revealing their true level of indebtedness. Alongside, states also need to take measures to shore up their revenues, reduce non-merit subsidies, and bring down their debt to more manageable levels.
This editorial first appeared in the print edition on June 22, 2022 under the title ‘Note to states’.
Best of Express Premium
- The Indian Express website has been rated GREEN for its credibility and trustworthiness by Newsguard, a global service that rates news sources for their journalistic standards.
