What does future hold for the rising debt to GDP ratio of states?
Recently, the Reserve Bank of India, in its report titled 'State Finances: A Study of Budgets of 2021-22', raised concerns about the worrying level of debt and debt to GDP ratio of states.
- Dec 14, 2021,
- Updated Dec 14, 2021 9:20 PM IST
The COVID-19 pandemic wreaked havoc across the world and brought the global and India economy to a screeching halt. The impact of the pandemic in disrupting the finances of the country and the states is visible in the form of high level of debts of both. Recently, the Reserve Bank of India (RBI), in its report titled 'State Finances: A Study of Budgets of 2021-22', raised concerns about the worrying level of debt and debt to GDP ratio of states.
According to the report, the combined debt-to-GDP ratio of states is expected to remain at 31 per cent by end-March 2022, which is worryingly higher than the target of 20 per cent to be achieved by 2022-23. However, the 15th Finance Commission expects the debt-GDP ratio to peak at 33.3 per cent in 2022-23, and gradually decline thereafter to reach 32.5 per cent by 2025-26.
As per an analysis by CRISIL Ratings of the top 18 states of India on the basis of Gross State Domestic Product (GSDP), Rajasthan (with total debt of Rs 4.9 lakh crore), Punjab (Rs 2.7 lakh crore), Uttar Pradesh (Rs 8.1 lakh crore), Andhra Pradesh (Rs 4.5 lakh crore) and Kerala (Rs 3.3 lakh crore) are among the most indebted states in the country.
Despite the recovery being witnessed after the second wave of infections, experts believes that the chances of improvement in the debt levels of states are bleak. A projection for a sample of 12 large state governments by credit rating agency ICRA said that the combined debt stock of all the 12 states would rise to 26.5 per cent of GSDP in FY2022 from 22.9 per cent of GSDP in the pre-pandemic period, i.e. FY2020.
"The 12 states are Karnataka, Kerala, Tamil Nadu, Gujarat, Maharashtra, Punjab, Haryana, Rajasthan, West Bengal, Telangana, AP and UP, whose combined GSDP (at current prices) comprised nearly 78 per cent of India's GDP (at current prices) in FY2020. Moreover, the combined leverage (debt + guarantees) level of these 12 states is estimated to widen to 30.6 per cent of GSDP in FY2022 from 26.4 per cent in FY2020," ICRA Chief Economist Aditi Nayar told BusinessToday.in.
Also Read: Hiring intent for Jan-March 2022 at 8-year high: ManpowerGroup study
Meanwhile, CRISIL Ratings expects the overall debt of states, including guarantees, to increase by Rs 7.2 lakh crore this year to Rs 71.4 lakh crore by the end of FY22. This will keep states' indebtedness at an elevated level of 33 per cent, only marginally lower than last year's level of 34 per cent.
"While states' overall revenues may improve by upwards of 15 per cent on year, supported by higher GST collections and rise in sales tax collection on fuel, we also expect the expenditure profile to increase due to the committed and the essential developmental expenses. Also, states may put the foot on the pedal towards capital expenditure to improve future tax potential and higher economic growth. Consequently, the overall indebtedness may continue to remain elevated for the states," said Manish Gupta, Senior Director of CRISIL Ratings.
The increase in the indebtedness of states in FY21 was primarily on account of substantial increase in the revenue deficits, Gupta said.
While the overall revenue of states declined by a marginal 3 per cent due to subdued economic activities, the revenue expenditure for the states increased by 8 per cent due to higher committed expenditure (related to salaries, pension and interest costs) and essential developmental expenditure (such as grants-in-aid, medical and labour welfare related expenses) that cumulatively contribute to 75-80 per cent of the total revenue expenditure.
Suggesting a way ahead for the states, the RBI report said that in the medium-term, improvements in the fiscal position will be contingent upon reforms in the power sector as recommended by the Finance Commission and specified by the Centre, like creating transparent and hassle-free provision of power subsidy to farmers, preventing leakage and improving fiscal health of power distribution companies.
Gupta believes that a raft of steps like improvement in the revenue, primarily non-tax revenue which is in state control, improvement in power sector through timely tariff determination, and capital outlay towards infrastructure can bring improvement in the financial position of states.
Also Read: Exclusive: Byju's-owned Great Learning to make two acquisitions this fiscal year; scouting for more
The COVID-19 pandemic wreaked havoc across the world and brought the global and India economy to a screeching halt. The impact of the pandemic in disrupting the finances of the country and the states is visible in the form of high level of debts of both. Recently, the Reserve Bank of India (RBI), in its report titled 'State Finances: A Study of Budgets of 2021-22', raised concerns about the worrying level of debt and debt to GDP ratio of states.
According to the report, the combined debt-to-GDP ratio of states is expected to remain at 31 per cent by end-March 2022, which is worryingly higher than the target of 20 per cent to be achieved by 2022-23. However, the 15th Finance Commission expects the debt-GDP ratio to peak at 33.3 per cent in 2022-23, and gradually decline thereafter to reach 32.5 per cent by 2025-26.
As per an analysis by CRISIL Ratings of the top 18 states of India on the basis of Gross State Domestic Product (GSDP), Rajasthan (with total debt of Rs 4.9 lakh crore), Punjab (Rs 2.7 lakh crore), Uttar Pradesh (Rs 8.1 lakh crore), Andhra Pradesh (Rs 4.5 lakh crore) and Kerala (Rs 3.3 lakh crore) are among the most indebted states in the country.
Despite the recovery being witnessed after the second wave of infections, experts believes that the chances of improvement in the debt levels of states are bleak. A projection for a sample of 12 large state governments by credit rating agency ICRA said that the combined debt stock of all the 12 states would rise to 26.5 per cent of GSDP in FY2022 from 22.9 per cent of GSDP in the pre-pandemic period, i.e. FY2020.
"The 12 states are Karnataka, Kerala, Tamil Nadu, Gujarat, Maharashtra, Punjab, Haryana, Rajasthan, West Bengal, Telangana, AP and UP, whose combined GSDP (at current prices) comprised nearly 78 per cent of India's GDP (at current prices) in FY2020. Moreover, the combined leverage (debt + guarantees) level of these 12 states is estimated to widen to 30.6 per cent of GSDP in FY2022 from 26.4 per cent in FY2020," ICRA Chief Economist Aditi Nayar told BusinessToday.in.
Also Read: Hiring intent for Jan-March 2022 at 8-year high: ManpowerGroup study
Meanwhile, CRISIL Ratings expects the overall debt of states, including guarantees, to increase by Rs 7.2 lakh crore this year to Rs 71.4 lakh crore by the end of FY22. This will keep states' indebtedness at an elevated level of 33 per cent, only marginally lower than last year's level of 34 per cent.
"While states' overall revenues may improve by upwards of 15 per cent on year, supported by higher GST collections and rise in sales tax collection on fuel, we also expect the expenditure profile to increase due to the committed and the essential developmental expenses. Also, states may put the foot on the pedal towards capital expenditure to improve future tax potential and higher economic growth. Consequently, the overall indebtedness may continue to remain elevated for the states," said Manish Gupta, Senior Director of CRISIL Ratings.
The increase in the indebtedness of states in FY21 was primarily on account of substantial increase in the revenue deficits, Gupta said.
While the overall revenue of states declined by a marginal 3 per cent due to subdued economic activities, the revenue expenditure for the states increased by 8 per cent due to higher committed expenditure (related to salaries, pension and interest costs) and essential developmental expenditure (such as grants-in-aid, medical and labour welfare related expenses) that cumulatively contribute to 75-80 per cent of the total revenue expenditure.
Suggesting a way ahead for the states, the RBI report said that in the medium-term, improvements in the fiscal position will be contingent upon reforms in the power sector as recommended by the Finance Commission and specified by the Centre, like creating transparent and hassle-free provision of power subsidy to farmers, preventing leakage and improving fiscal health of power distribution companies.
Gupta believes that a raft of steps like improvement in the revenue, primarily non-tax revenue which is in state control, improvement in power sector through timely tariff determination, and capital outlay towards infrastructure can bring improvement in the financial position of states.
Also Read: Exclusive: Byju's-owned Great Learning to make two acquisitions this fiscal year; scouting for more