Five states, namely, Bihar, Kerala, Punjab, Rajasthan, and West Bengal, figure among the most stressed states fiscally, as per a Reserve Bank of India article.
The RBI conducted a detailed study of the states’ finances following the recent Sri Lanka crisis. The RBI in its study has concluded that the finances of the states have deteriorated sharply owing to the Covid-19 pandemic.
States’ tendency towards handing out cash subsidies, provision of free utility services, revival of the old pension scheme, and extension of implicit and explicit guarantees have put states in a peculiar position.
RBI has determined that the average GFD-GDP ratio (gross fiscal deficit to nominal GDP ratio) of the states remained modest at 2.5% during 2011- 12 to 2019-20. This is lower than the Fiscal Responsibility Legislation (FRL) ceiling of 3%.
But then the pandemic hit, and the states’ fiscal positions deteriorated sharply in 2020 with a sharp decline in revenue, an increase in spending, and a sharp rise in debt to GSDP ratios.
The debt-GSDP (gross state domestic product) ratio is projected to moderate between 2021-22 and 2026-27, RBI says. It has attributed the moderation in the ratio primarily to the stellar fiscal performance of Gujarat, Maharashtra, Delhi, Karnataka, and Odisha.
RBI expects Punjab to remain in the worst position, with its debt-GSDP ratio projected to exceed 45% in 2026-27, while Rajasthan, Kerala and West Bengal are projected to exceed 35%.
These states will need to undertake significant corrective steps to stabilise their debt levels, the RBI has said.
High debt & freebies: Poor spending priorities?
Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh, and Haryana are the states with the highest debt burden in India.
These 10 states account for around half of the total expenditure by all state governments in India.
When it comes to expenditure, states like Rajasthan, West Bengal, Punjab and Kerala spend around 90% on revenue accounts. The impact of revenue expenditure on economic activity lasts for about a year. These states have high revenue spending to capital outlay ratios.
Capital outlays have a longer-lasting impact on economic activity, with the peak effect materialising after two-three years.
In the medium to long term, states with high revenue spending and low capital investment may experience slower revenue growth and higher interest outgo.
Data shows Gujarat, Punjab and Chhattisgarh spend more than 10% of their revenue expenditure on subsidies, which are known to crowd out resources from other useful purposes.
Source Name:-Economic Times