MUMBAI: The Covid-19 pandemic brought India’s economy to a grinding halt, and, although the Centre was overstretched financially, so were the states, with many reeling under increasing debt.
According to an RBI report titled ‘States Finances – A Risk Analysis’, the average GFD-GDP ratio of the states before the pandemic stood at a 2.5 per cent (2011-12 to 2019-20), which was lower than the Fiscal Responsibility Legislation (FRL) ceiling of 3 per cent. However, the states’ fiscal position deteriorated sharply in 2020 with a sharp decline in revenue, increase in spending and a sharp rise in debt to GSDP ratios, said the report. In terms of debt to GSDP ratio, Bihar, Kerala, Punjab, Rajasthan and West Bengal are highly stressed states. Significantly, while the debts are rising, the tax revenue is declining. The tax revenue of Madhya Pradesh, Punjab and Kerala, has been declining over time, making them fiscally more vulnerable, said the report.
For most of these states, nontax revenue has remained volatile, dropping significantly in recent years. The declining tax revenue and non-tax revenue are affecting the states’ expenditure planning and also increasing their dependence on market borrowing. According to the RBI report, the decline in non-tax revenue is under general services, interest receipts and economic services. The RBI forecast of debt to GDP ratio for the period of 2026-2027 for some states is as follows: Bihar 31.2 per cent, Punjab 46.8 per cent, Kerala 38.2 per cent, Rajasthan 39.4 per cent, and West Bengal 37 per cent. Most of the other states are likely to exceed the debt-GSDP ratio of 30 per cent in 2026-27.
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Another factor that is deteriorating the financial health of the states is high expenditure on subsidies, as per the latest available data from the Comptroller and Auditor General of India (CAG). The state governments’ expenditure on subsidies has grown at 12.9 per cent and 11.2 per cent during 2020-21 and 2021- 22, respectively, after contracting in 2019-20. According to the CAG report, the share of subsidies in total revenue expenditure by states has also risen from 7.8 per cent in 2019- 20 to 8.2 per cent in 2021-22.
It is in this backdrop that the recent remarks of NK Singh, Chairperson of the 15th Finance Commission, assume a sinister significance. He said that while states’ share of Central taxes is their right, revenue deficit grants given monthly to them should be linked to the curbing of freebies and off-Budget liabilities. In his presentation at the recent conclave of state chief secretaries, Finance Secretary TV Somanathan said that many states are mortgaging public assets like municipal parks, hospitals, and other public offices to raise funds to finance their revenue spending.
Five states — Andhra Pradesh, Uttar Pradesh, Punjab, Madhya Pradesh, and Himachal Pradesh — raised up to Rs 47,316 crore in the two years ending March 2022 through “escrowing of future revenue” — using state assets in the safe custody of a financial institution to secure loans against them — the presentation showed.
According to the Central Government, if such loans are secured, they should be clearly disclosed to it under the states’ net borrowing ceiling (NBC). As a first step in this regard, it tightened the noose on state borrowings at beginning of the financial year 2022-23. It decided that offBudget loans taken by state entities, where the principal amount and interest of the loans are serviced by the state itself, will be deemed to be part of the states’ debt and will be considered while deciding the annual net borrowing ceiling (NBC) for states in any given year.
