Debt-to-GSDP (Gross State Domestic Product) ratio signifies how healthy a state is in terms of funding its expenditure without accumulating future debt. The Reserve Bank of India (RBI), in its report also highlighted that the debt-to-GSDP ratio for 18 states and union territories has grown to 31.2% from 22.6% in the last 10 years, ending September 2021, which goes against the fiscal health of some of the high ratio states. Fiscal Responsibility and Budget Management (FRBM) committee headed by former revenue secretary N.K. Singh had recommended states to achieve a debt-to-GSDP ratio of 20% by the financial year 2022-23, but it looks a far-fetched target.
According to the RBI report, market borrowing has reached 63.6% of the GDP of states by March 2022, which is a loan that governments raise by issuing market securities such as bonds. Market borrowing forms the largest component of the total outstanding debt of states and union territories. The RBI says, the combined debt-to-GSDP ratio is expected to remain at 31% by March end of 2022, which is much higher than the recommendation of the report of the NK Singh committee. As per the report, the states with the highest debt-to-GSDP ratio in 2021-22 include Punjab with 53.3%, Rajasthan with 39.8%, West Bengal with 38.8%, Kerala with 38.3% and Andhra Pradesh with 32.4%.
The rise in the debt of Indian states fuelled by Covid-19 pandemic generated long lockdown and pre-state election freebie promises among others, has made things worrisome, especially for a few states like Punjab, Andhra Pradesh, Rajasthan, West Bengal and Kerala. How states damage their fiscal health, can be gauged from the fact that the Aam Aadmi Party (AAP) promised the people in Punjab- 300 units of free electricity a month for every household, besides Rs 1,000 a month to every woman in the state, which according to estimates, may cost the exchequer an extra Rs 20,000 crore a year, when Punjab’s outstanding debt has already risen to Rs 2.82 lakh crore. Similar is the case with Andhra Pradesh, whose outstanding debt has hit Rs 3.89 lakh crore in the financial year 2021-22.
However, there are silver lines appearing too. The ICICI Securities after studying the budgets of 13 large states which account for around 80% of the national GDP, suggests in its March report that aggregate gross fiscal deficit (GFD) may ease to 3.3% in 2022-23 as compared to 3.4% in 2021-22. Moreover, with the recovery in economy, states are also going to have more revenue, which will also be supported by the higher transfer of fund by the Central Government. The Centre has transferred Rs 8.83 lakh crore in 2021-22 as per the recommendations of the 15th finance commission under tax devolution plan. Besides, the Centre also transferred Rs 1.59 lakh crore to the state government on account of GST compensation.
Further, under 15th Finance Commission, states have got a lot more flexibility in spending on developmental activities, but most of their spending went into populist schemes with slow growth in revenues. Indian states are also technically unlikely to default on the debt repayments, as the Centre imposes strict limits on their borrowings. Without doubt, the pandemic has greatly aggravated the situation, leaving the states with little or no buffers or fiscal headroom, some of the states are also responsible for complicating the situation.
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