As state debt remains considerably above the level recommended by the Fiscal Responsibility and Budget Management review committee, the RBI report calls for — rightly so — a “credible roadmap for debt consolidation.”
Dec 21, 2024 07:00 IST First published on: Dec 21, 2024 at 07:00 IST
During the pandemic, state governments had witnessed a marked deterioration in their debt-deficit position. In 2020-21, the combined fiscal deficit of all states had edged up to 4.1 per cent of GDP and their debt-to-GDP ratio had risen to 31 per cent. However, as the RBI’s latest report on state finances notes, state governments have in the years thereafter stuck firmly to the path of fiscal consolidation, bringing down their debt to 28.5 per cent by March 2024 and their deficit to 2.9 per cent. Alongside, they have also managed to ramp up allocations for capital expenditure. Their total capital outlay has risen from 2.1 per cent of GDP in 2020-21 to 2.6 per cent in 2023-24, and is further budgeted to increase to 2.8 per cent in 2024-25. These are encouraging developments.
However, the report also flags several areas of concern. For one, the power sector. The losses of power distribution companies stood at a staggering Rs 6.5 lakh crore by 2022-23, despite many attempts to improve their financial metrics over the years. To put this loss in perspective — its equivalent is around 2.4 per cent of GDP. In recent years, states have also seen a sharp increase in subsidies, due to “farm loan waivers, free/subsidised services (like electricity to agriculture and households, transport, gas cylinder and cash transfers to farmers, youth and women”. The amounts involved are significant. According to an Axis Bank report, 14 states now have income transfer schemes for women with a spending of Rs 2 lakh crore. This amounts to roughly 0.6 per cent of GDP. Such forms of spending will limit the resources available to governments for expenditure on more productive avenues. Then there are contingent liabilities. As per the RBI report, state guarantees have witnessed a steady increase, rising from 2 per cent of GDP at the end of March 2017 to 3.8 per cent by March 2023.
As state debt remains considerably above the level recommended by the Fiscal Responsibility and Budget Management review committee, the RBI report calls for — rightly so — a “credible roadmap for debt consolidation.” In particular, it says that states with high levels of debt — these would include states such as Punjab, Bihar, Kerala and West Bengal — “may establish a clear, transparent and time-bound glide path for debt consolidation.” The report also calls for “next generation” fiscal rules which, while providing states the flexibility to deal with shocks such as the pandemic, would be guided by the objective of ensuring medium-term fiscal sustainability. These suggestions should generate more debate in the coming weeks and months.
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