Five states need to take steps to stabilise debt levels: RBI

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• The recent RBI study stated that a few of the Indian states are stressed with high debt-GSDP ratios.
  • The study revolves around ten states – Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana.

More about the study

• Debt-GSDP ratio:
  • Based on the debt-GSDP ratio in 2020-21, Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana turn out to be the states with the highest debt burden.
    • These 10 states account for around half of the total expenditure by all state governments in India.
  • Punjab is expected to remain in the worst position as its debt-GSDP ratio is projected to exceed 45 percent in 2026-27, with further deterioration in its fiscal position.
• Debt and fiscal deficit targets:
  • Among the ten states, Andhra Pradesh, Bihar, Rajasthan and Punjab exceeded both debt and fiscal deficit targets for 2020-21 set by the 15th Finance Commission (FC-XV). 
  • Kerala, Jharkhand and West Bengal exceeded the debt target, while Madhya Pradesh overshot the fiscal deficit target. 
  • Haryana and Uttar Pradesh were exceptions as they met both criteria. 
  • Rajasthan, Kerala and West Bengal are projected to surpass the FC-XV targets for debt and fiscal deficit in 2022-23 (BE).
• Tax and non-Tax revenue:
  • It said the own tax revenue of some of these 10 states, viz., Madhya Pradesh, Punjab and Kerala, has been declining over time, making them fiscally more vulnerable. 
  • For most of these states, non-tax revenue has remained volatile, dropping significantly in recent years. 
• Losses of DISCOMs:
  • According to the RBI study, the combined losses of DISCOMs in the five most indebted states, viz., Bihar, Kerala, Punjab, Rajasthan and West Bengal, constituted 24.7 percent of the total DISCOMs losses in 2019-20. 

Causes

• Pandemic:
  • On a general level, the Covid-19 pandemic is seen as the primary reason for a surge in debt levels of Indian states. However, the slowdown in economic activity had begun in 2018-19, nearly two years before the pandemic hit.
• Subsidies:
  • A large proportion of committed expenditure and subsidies are not matched by their revenues.
  • Most of the States’ spending went into populist schemes with slow growth in revenues.
• Market borrowings:
  • Most States increased their market borrowing during the pandemic as their fiscal deficits expanded.
• Absence of strong revenue sources:
  • States like Gujarat and Maharashtra managed to maintain their debt below 20 percent of their GSDPs, mainly due to their strong industrialised economies resulting in strong revenue streams.
• Longer maturity debts:
  • States have been taking longer maturity debt unlike the norm of 10 years followed say five years back. 
  • This in turn keeps their debt levels higher for an extended period of time as they will be redeemed later.
• Losses of DISCOMs:
  • Discoms’ revenues have significantly dropped in FY21 with demand from high-paying industrial and commercial consumer segments getting disrupted amid the lockdowns.
  • Another factor responsible is the Centre’s Ujwal DISCOM Assurance Yojana (UDAY) scheme, which allowed the state governments that own power distribution companies to take over 75 percent of these companies’ debt till September 2015 and pay back the lenders by selling bonds.

Fiscal Responsibility Budget Management (FRBM) Act

• It was enacted in 2003. 
• It sets targets for the government to achieve fiscal stability.
• It provides the provisions for required flexibility for RBI– 
  • To deal with inflation, 
  • To improve the management of public funds, 
  • To strengthen fiscal prudence and reduce fiscal deficits.
• It made mandatory to place annually the- 
  • Union Budget documents, 
  • Medium Term Fiscal Policy Statement, 
  • Macroeconomic Framework Statement and 
  • Fiscal Policy Strategy Statement in the Parliament. 
• It proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding liabilities be projected as a percentage of gross domestic product (GDP) in the medium-term fiscal policy statement.

• The Act prescribes the ceiling for debt to GSDP ratio at 25 percent.
• It prescribes the fiscal deficit limit of 3 percent of GSDP. 

Way Ahead

• Increasing capital expenditures:
  • Although welfare-enhancing, the impact of revenue spending on economic activity lasts for just about a year. 
  • In contrast, the impact of capital outlay is stronger and lasts longer, with the peak effect materialising after two-three years
• Need for fiscal council:
  • There is a need for some kind of fiscal council or interstate mechanism that can ensure that FRBM limits on spending are strictly adhered to, along with ensuring the quality of expenditure.
• Wiser public spending:
  • Efficiency in public spending should now become part of discussions. This can happen through tax-benefit models that look at how state resources can be best utilised.
• Requirement of different policies for each state:
  • There has to be a differentiated approach for different states as different states cannot shrink their debt-to-GSDP ratio at the same speed.
  • The policy, for example, for Gujarat cannot be the same as for West Bengal because the starting conditions are different and their political economy is different. 
• Alternative revenue sources:
  • The conundrum is that with less flexibility to raise taxes, states have to find alternative ways of raising revenue like asset monetisation or else they will be deep in this syndrome.

Source: BS