UPSC Daily Editorial Analysis | Debt Burden of States | 22 June 2022

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What the article is about?

  • Talks about the high debt burden of some states and the concerns associated with it.

Syllabus: GS-III Economy, Fiscal federalism

Debt Burden:

  • A recent study by economists at the Reserve Bank of India notes that 10 states — namely, Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana — have the highest debt burden.
    • Of these, the five most fiscally stressed are Bihar, Kerala, Punjab, Rajasthan and West Bengal. All these states have a debt to GSDP ratio in excess of 30 per cent.

Concerns:

  • A high debt level translates to higher interest payments.
    • According to the report, the share of interest payments in revenue receipts exceeds 20 per cent for most of these states.
    • Coupled with allocations for pension and administrative payments, the share of committed expenditure for these states is at least 30 per cent of revenue expenditure.
    • With such a large share of their expenditure firmly earmarked, it restricts the fiscal space to spend on more productive avenues.
  • States have also ramped up spending on subsidies.
    • While a distinction needs to be made between merit and non-merit subsidies, politically motivated decisions such as providing free electricity or waiving of outstanding utility bills, profligate from a fiscal view, will aggravate the stress, and distort the functioning of the market.
  • The failure to turn around the financial position of power distribution companies and opting out of the new pension scheme — Rajasthan and Chhattisgarh have recently done so — will only exacerbate the situation.
    • Their space to manoeuvre has been restricted by slowing revenues, a rising share of committed expenditure and higher outgoes on subsidies.
    • Unless the GST Council decides otherwise, they will witness a further fall in revenues once the compensation period draws to a close.
  • Over the past few years, some states have also been pushing part of their borrowings off budget, circumventing their ceilings.
    • While there is little clarity on the extent of these obligations, the central government has now taken cognisance of this.

Way Out:

  • It has recently asked states to bring on its books all off-budget borrowing undertaken over the past two years.
    • This will bring about much needed transparency in state finances, revealing their true level of indebtedness.
  • Alongside, states also need to take measures to shore up their revenues, reduce non-merit subsidies, and bring down their debt to more manageable levels.



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