Last month the Reserve Bank of India (RBI) bulletin had a particularly troubling analysis on state finances. The report concluded that some states have now reached unsustainable debt limits.

The report uses 3 measurements: debt to GDP of state (GSDP); fiscal deficit to GSDP; and interest payments as a percentage of the states’ total revenue.

The report says 10 states have debt to GDP near or above 30 percent which is the laxman rekha drawn by the finance commission. These states include Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana.

On the second parameter — fiscal deficit to GDP, nearly 10 states are above the finance commission’s limit of 3 percent. States with highest deficits, and many are common with the first list: Bihar, Rajasthan, Punjab, Uttar Pradesh, Kerala, Madhya Pradesh, Telangana, Tamil Nadu and Chhattisgarh.

The most important is the third parameter — how much of the states’ revenue is going to meet interest payments. Again a few common names: Punjab, Tamil Nadu, Haryana, West Bengal, Kerala, Rajasthan, Andhra Pradesh, Karnataka and Gujarat.

So drawing the most common names. the report says the following five states are most stressed: Bihar, Kerala, Punjab, Rajasthan and West Bengal.

The report says high subsidies, high committed expenses like pensions and above all, freebies for power, are wrecking state finances. On freebies, the states ranking high are Andhra Pradesh, Jharkhand, Madhya Pradesh, Punjab and West Bengal.

Separately there is a list of states with off-balancesheet debt which is mostly by the power distribution companies and their debt has become totally unsustainable. These states include Tamil Nadu, Madhya Pradesh, Rajasthan, Punjab and Jharkhand.

According to the report, if these state governments were to assume 75 percent of their discom debt, which they may have to, then the cost will be really high. For Tamil Nadu the cost will be Rs 1.14 lakh crore or 5.2 percent of the states GDP, and even for Rajasthan and Punjab the amount is going to be over 3 percent of their GDP.

The report ends with a warning that given the plight of Sri Lanka which has descended into chaos because of a huge fiscal deficit. The Indian states with unsustainable debt need to act fast, cut subsidies and unnecessary freebies.

However former Kerala finance minister Thomas Isaac believes that there is no question of any state falling from unsustainable debt burden. He said Kerala has chosen the path of development and that implies that its revenue deficit would be relatively high.

“Kerala has chosen the path of development and that implies that our revenue deficit would be relatively high because the social expenditure would result in much higher recurring expenditure. Therefore a major part of our borrowing would go into the revenue expenditure, particularly education and healthcare. States have permission to borrow at 3 percent GSDP. So if you are borrowing at 3 percent GSDP and you have a normal growth, in fact Kerala’s growth has been much higher than national average from 1987, then there is no question of any state falling from unsustainable debt burden.”

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Pinaki Chakraborty, former director at NIPFP believes that it is important to have control on the overall fiscal deficit (Centre plus states). He said comparing Indian states with Sri Lanka is wrong.

“Just saying that these 5 states are going to create a major macro crisis or fiscal crisis is not correct. Macro stability is a central function and given the fact that in India state governments borrow as much as the central government borrows, it is very important to have a control on the overall fiscal deficit, that is Centre plus states. Also states cannot borrow externally and it is a constitutional provision. So comparing our states with Sri Lanka may not be right at all.”

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However Chakraborty feel that off-budget liabilities of states are a problem and needs attention.

“The problem lies in off-budget liabilities. I think there is a need to look at what are the off-budget fiscal risks arising out of states’ fiscal operation and we need to focus our attention on that.”

Watch video for entire discussion.

First Published:Jul 18, 2022 8:39 PM IST