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

What is the News?

According to a Reserve Bank of India(RBI) study, five states namely, Bihar, Kerala, Punjab, Rajasthan, and West Bengal figure among the most stressed states fiscally.

RBI on Status of States Debts

Based on the debt-GSDP ratio in 2020-21, Ten states namely Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana are the states with the highest debt burden.

These 10 states account for around half of the total expenditure by all state governments in India.

For instance, ​​Punjab’s debt-GSDP ratio is projected to exceed 45% in 2026-27. Rajasthan, Kerala and West Bengal are projected to exceed the debt-GSDP ratio of 35% by 2026-27. 

Hence, these states will need to undertake significant corrective steps to stabilize their debt levels.

What is the reason for the fiscal deterioration in these states?

Exceeded Debt and Fiscal 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). 

Declining Tax Revenue: The own tax revenue of some of these states, viz Madhya Pradesh, Punjab and Kerala has been declining over time making them fiscally more vulnerable.

High Revenue Expenditure: The share of revenue expenditure in total expenditure of these states varies in the range of 80-90%. This results in poor expenditure quality, as reflected in their high revenue spending to capital outlay ratios.

Significant Committed Expenditure: ​​Committed expenditure which inter alia includes interest payments, pensions and administrative expenses accounts for a significant portion (over 35%) of the total revenue expenditure in some of these states.

High Discoms Losses: The combined losses of DISCOMs in the five most indebted states, viz Bihar, Kerala, Punjab, Rajasthan and West Bengal, constituted 24.7% of the total DISCOMs losses in 2019-20 while their combined long-term debt was 22.9% of the total DISCOM debt in 2019-20.

What are the recommendations given by RBI to states to improve their fiscal position?

– In the near term, state governments must restrict their revenue expenses by cutting down expenditure on non-merit goods. 

– In the medium term, states need to put efforts toward stabilizing debt levels.

– In the long term, states need to increase the share of capital outlays in the total expenditure. This will help create long-term assets, generate revenue and boost operational efficiency.

– Moreover, states also need to undertake large-scale reforms in the power distribution sector to reduce losses and make them financially sustainable and operationally efficient.

– Alongside, state governments need to conduct fiscal risk analyses and stress test their debt profiles regularly to be able to put in place provisioning and other specific risk mitigation strategies to manage fiscal risks efficiently.

Source: The post is based on the article “Five states need to take steps to stabilize debt levels: RBI” published in Indian Express on 21st June 2022.