Three key takeaways from RBI’s report on state govt Budgets

Source: The post is based on the article “Three key takeaways from RBI’s report on state govt Budgets” published in Indian Express on 19th January 2023.

What is the News?

The Reserve Bank of India has released its report on state government budgets for 2022-23.

What are the key highlights from the RBI’s report on state govt Budgets?

Debt-to-GDP: The state debt-to-GDP ratio remains uncomfortably high. As per the report, the debt-to-GDP ratio has fallen from 31.1% in 2020-21 – a year when states had struggled to manage the economic fallout of the pandemic — to 29.5% in 2022-23.

– To put this number in perspective, the Fiscal Responsibility and Budget Management(FRBM) review committee headed by N K Singh, had recommended a debt-to-GDP ratio of 20% for states. 

– A high debt-deficit burden leaves little room for states to manoeuvre when faced with the next economic shock. A high debt burden may also imply that states may have to pay more to service their obligations. 

​​Contingent liabilities: State governments have seen a significant expansion in their contingent liabilities. Contingent liabilities here refer to the obligations of a state government to repay the principal and interest payments in case a state-owned entity defaults on a loan.

– As per the report, the guarantees issued by state governments have risen from Rs 3.12 lakh crore or 2% of GDP in 2017 to Rs 7.4 lakh crore or 3.7% of GDP. 

Old Pension Scheme: In the early 2000s, there was a growing realization that financing the old pension scheme would prove to be challenging. Thus, a new pension framework was ushered in which would limit the financial burden of the state. 

– While most states had then signed on to the new pension scheme, some states such as Rajasthan and Chhattisgarh have now chosen to revert.

– This will have adverse implications for state finances. States already allocate a significant portion of their own tax revenues towards pension — in 2020-21, Rs 3.86 lakh crore was allocated towards pension. Hence, shifting back to the old pension scheme will only end up increasing pension liabilities, leaving even less room for more productive spending.