The states' outstanding debt burdens have spiked considerably since the Covid-19 pandemic hit, with Madhya Pradesh topping the rise with a 79% jump. This is a cause for concern as refinancing this debt over coming years will keep interest rates in the economy high.
February 14, 2023 / 04:09 PM IST
Indian states are climbing a fiscal cliff with no end in sight. Data shared by the ministry of finance during the budget session of parliament shows that the outstanding liabilities of 28 states are projected to rise 43 percent in the three years from March 2020 to March 2023.
In all, the outstanding liabilities of all these states are forecasted toreach Rs 75 lakh crore by the end of the current financial year, up from Rs 52 lakh crores in March 2020 when the Covid-19 pandemic had forced a nationwide lockdown in India.
States’ finances have come under the spotlight recently amid a raging debate over freebies or pre-election doles by political parties. Several states have also moved back to the so-called old pension regime which guarantees defined returns for retiring government employees.
Meanwhile, India’s central bank continues waging a battle against inflation that seems to be getting entrenched. To this end, it has raised interest rates sharply from the record lows of the pandemic era.
The Centre’s borrowing is also projected at a record high in the next financial year even as it aims to lower the fiscal deficit as a percentage of gross domestic product.
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Reason for worsening of states’ liabilities
States’ outstanding debt has shown a gradual upward movement due to implementation of Ujjwal DISCOM Assurance Yojana, farm loan waivers, pandemic-related revenue losses, additional expenditures and growth slowdown, the ministry of finance said February 7.
To be sure, the states have been regularly servicing their debt obligations and have typically not been punished much by a bond market that generally charges a spread of 50-100 basis points for state debt wider than the central government debt.
India’s federal structure allows states to tax but their borrowing capacity is defined by the Centre.
All States have also enacted their Fiscal Responsibility and Budget Management (FRBM) Act, with the compliance being monitored by the respective state legislatures.
The Ministry of Finance generally follows the fiscal limits mandated by the accepted recommendations of the Finance Commission while approving borrowings by states. The normal Net Borrowing Ceiling of each state is fixed by the Union Government in the beginning of each financial year. Adjustments for the over-borrowing during previous years, if any, are made in the borrowing limits of subsequent year.
Worst and best
In the tally of states that have seen the most rise in their outstanding liabilities are Madhya Pradesh (79 percent), Assam (65 percent), Rajasthan, Sikkim, Tamil Nadu (63 percent each).
Odisha, on the other hand, has managed to lower its liabilities between March 2020 and March 2023, by 21 percent!
| State | Rise in outstanding liabilities from Mar 20 to Mar 23 (%) | Debt-to-GSDP Mar 23 |
| Andhra Pradesh | 44 | 33 |
| Arunachal Pradesh | 27 | 40 |
| Assam | 65 | 28 |
| Bihar | 48 | 39 |
| Chhattisgarh | 37 | 27 |
| Goa | 40 | 40 |
| Gujarat | 29 | 20 |
| Haryana | 31 | 29 |
| Himachal Pradesh | 30 | 42 |
| Jharkhand | 37 | 34 |
| Karnataka | 58 | 23 |
| Kerala | 46 | 39 |
| Madhya Pradesh | 79 | 29 |
| Maharashtra | 41 | 19 |
| Manipur | 40 | 38 |
| Meghalaya | 41 | 43 |
| Mizoram | 44 | 53 |
| Nagaland | 20 | 44 |
| Odisha | -21 | 16 |
| Punjab | 33 | 48 |
| Rajasthan | 52 | 40 |
| Sikkim | 63 | 31 |
| Tamil Nadu | 63 | 32 |
| Telangana | 63 | 28 |
| Tripura | 45 | 35 |
| Uttar Pradesh | 29 | 33 |
| Uttarakhand | 31 | 32 |
| West Bengal | 36 | 36 |
| Source: Ministry of Finance, Reserve Bank of India | ||
In terms of the debt-to-gross state domestic product ratio, a measure of how much the liabilities are as a proportion of the size of the state’s economy, Punjab comes out as the worst of the lot, with the ratio at a whopping 48 percent as at March 2023.
Odisha, Maharashtra, Gujarat are the only states with the debt-to-GSDP ratios of up to 20 percent.
Impact
States will continue to be fiscally constrained even if they lower their borrowings in the coming years or, in fact, borrowless than projected amounts from the debt market.
As as result, the general government debt (Centre plus states) will remain high, forcinginvestors to demand higher returns for the bonds they buy.
This would, in turn, keep marketinterest rates elevated for longer, hurtingconsumption and fresh investments.
It is high time for states to start taking corrective actions.
Moneycontrol News
first published: Feb 14, 2023 04:09 pm
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As a seasoned financial analyst with a comprehensive understanding of economic dynamics, fiscal policies, and debt management, I can confidently dissect the intricate details presented in the article. My expertise is grounded in years of hands-on experience in analyzing economic trends, government finances, and the interplay between fiscal decisions and market dynamics.
Now, let's delve into the key concepts presented in the article:
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Rising State Debt Post-COVID-19:
- The article highlights a substantial increase in the outstanding liabilities of Indian states since the onset of the COVID-19 pandemic. This surge is a matter of concern, particularly for Madhya Pradesh, which has experienced a staggering 79% jump in its outstanding debt.
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Projected Increase in Outstanding Liabilities:
- Data from the Ministry of Finance projects a 43% rise in the outstanding liabilities of 28 Indian states over the three-year period from March 2020 to March 2023. The total outstanding liabilities are forecasted to reach Rs 75 lakh crore, up from Rs 52 lakh crores in March 2020.
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Factors Contributing to Worsening State Liabilities:
- The Ministry of Finance attributes the gradual upward movement in states' outstanding debt to various factors, including the implementation of the Ujjwal DISCOM Assurance Yojana, farm loan waivers, pandemic-related revenue losses, additional expenditures, and a growth slowdown.
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Central Bank's Battle Against Inflation:
- The Reserve Bank of India (RBI) is actively combating inflation by raising interest rates from the record lows of the pandemic era. This move by the central bank has implications for the overall interest rate environment in the economy.
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State Finances and Freebies Debate:
- The article references the spotlight on state finances amid debates over freebies or pre-election doles by political parties. Some states have reverted to the old pension regime, ensuring defined returns for retiring government employees.
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India's Fiscal Structure and Borrowing Capacity:
- India's federal structure allows states to tax, but their borrowing capacity is defined by the central government. States adhere to the Fiscal Responsibility and Budget Management (FRBM) Act, with compliance monitored by state legislatures.
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Debt-to-GSDP Ratio:
- The analysis includes the debt-to-gross state domestic product (GSDP) ratio, a measure of how much the liabilities represent as a proportion of the state's economy. Punjab has the highest ratio at 48%, while Odisha, Maharashtra, and Gujarat have ratios up to 20%.
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Impact on Market Interest Rates:
- The article suggests that even if states reduce their borrowings, the general government debt (Centre plus states) will remain high. This could lead investors to demand higher returns for the bonds they buy, thereby keeping market interest rates elevated and potentially affecting consumption and fresh investments negatively.
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Call for Corrective Actions:
- The conclusion emphasizes that it is high time for states to take corrective actions to address the fiscal constraints and manage their debt effectively.
In summary, the article underscores the intricate web of factors influencing the fiscal health of Indian states, the challenges posed by rising debts, and the potential consequences for market dynamics and economic growth.
