An article by the Reserve Bank of India (RBI) flagging concerns over mounting financial stress in several states and calling for corrective action in the five most indebted states drew mixed reactions, with some calling the assessment false and others pointing to increased revenue to counter calls to cut spending.
Referring to the economic crisis in Sri Lanka, the RBI article prepared by a team of economists under Deputy Governor Michael Debabrata Patra said on Thursday that the five most indebted states – Punjab, Rajasthan, Bihar, Kerala and West Bengal – – need to take corrective action by reducing expenditure on non-meritorious goods.
State finances are vulnerable to a variety of unexpected shocks that could alter their fiscal outcomes, causing slippages from their budgets and expectations, he said.
“The recent economic crisis in neighboring Sri Lanka is a reminder of the critical importance of public debt sustainability. Indian state fiscal conditions are showing early signs of growing stress,” he said.
For some states, he added, shocks can significantly increase their debt, raising fiscal sustainability issues.
For the five most indebted states of Bihar, Kerala, Punjab, Rajasthan and West Bengal, the stock of debt is no longer sustainable as debt growth has outpaced their gross domestic product growth (GSDP) over the past five years, he warned.
Former Kerala finance minister and member of the ruling CPI(M) State Secretariat, TM Thomas Isaac said the state could not cut spending and said the RBI had adopted a vision to short view of states showing warning signs of stress.
According to him, only a marginal reduction can be made in Kerala’s tax expenditures by reducing expenditures for various government activities, which is far from total government expenditures.
Sanyam Lodha, adviser to the Chief Minister of Rajasthan, said loans from all states have increased and comparative data is available. Even the Centre’s loan has increased considerably. GST compensation to the state is not paid by the Centre.
“Bad decisions like demonetization, GST or even during the corona period, the Center gave no encouragement to the states for the loss they suffered,” he said, adding that one must be ask what incentive the Center provides to reduce the revenue shortfall.
The Center introduced an additional excise tax and duty on gasoline and diesel and the states are not entitled to it due to which the state suffered a loss. “The Union of India seriously weakens the states,” he added.
Akhil Arora, Finance Secretary of Rajasthan, said: “State revenues are increasing. We can show you the growth curve of government revenues and expenditures over the past two years. Asked about the increased grant burden, Arora said: “I don’t know which RBI report you are referring to and how long it lasted. We can show you the data we have which is in the public domain and also audited. .” Speaking to PTI, Isaac said providing a stimulus package to Kerala to invest in capital expenditure is the only way out to overcome the crisis.
“The Center should provide a stimulus package to the state for capital spending, so that revenues pick up,” he said.
West Bengal has pegged the estimated debt stock till March 2023 at Rs 5,86,438 crore, a bit higher than what was expected at Rs 5,28,833 crore at the end of March 2022.
Economists said the rise in government debt was mainly due to a series of social protection measures to support people’s livelihoods, which had been hit hard by the pandemic. They said it was straining the government’s finances.
Renowned Economist and former ISI Professor Abhirup Sarkar said: “West Bengal’s debt/SGDP had declined since 2011-12 amounting to 45% which has since declined to 35% according to a research paper prepared by RBI. However, West Bengal remained among the five most indebted states along with Kerala and Rajasthan.” In its 2022 estimate, RBI said West Bengal’s debt-to-SGDP ratio was pegged at 38.8%.
BJP Rajasthan State Chairman Satish Poonia said it is right that the debt per capita in Rajasthan is continuously increasing. “This is happening due to economic indiscipline and financial mismanagement by the state government,” he said.
“The total debt of the state is over Rs 4 lakh crore. The government is not able to manage its finances well and there is no source of revenue generation. Even the government is misusing the money centrally sponsored diets,” he added.
A slowdown in its own tax revenue, a high share of committed spending and the increased burden of subsidies have strained the state government’s finances already exacerbated by COVID-19, according to the RBI article.
“New sources of risk have emerged in the form of increased spending on unmerited freebies, expanding contingent liabilities and lagging discoms,” he said.
According to the article, new sources of risk have emerged following the revival of the old pension system by some States; increased spending on non-meritorious gifts; increase contingent liabilities, justifying strategic corrective actions.
“The stress tests show that the fiscal conditions of the governments of the most indebted states are expected to deteriorate further, with their debt-PISG ratio expected to remain above 35% in 2026-27,” the authors said.
The central bank, however, said the views expressed are those of the authors and do not necessarily reflect the views of the Reserve Bank of India.
As a remedy, the article suggested that state governments should restrain their expenditure of revenue by reducing spending on non-meritorious goods in the short term.
In the medium term, he added, governments should strive to stabilize debt levels.
He also recommended large-scale reforms in the electricity distribution sector, which would enable discoms (electricity distribution companies) to reduce losses and make them financially viable and operationally efficient.
In the long term, increasing the share of capital expenditures in total expenditures will help build long-term assets, generate revenue, and increase operational efficiency.
At the same time, state governments need to conduct regular fiscal risk analyzes and stress tests of their debt profiles so that they can put in place provisioning strategies and other specific risk mitigation strategies to effectively manage the fiscal risks.
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)