StatsGuru: The state of states' finances

In a recent interview to Business Standard, West Bengal Finance Minister Amit Mitra raised the issue of growing indebtedness at the state government level. In fact, he likened the situation to a "ticking time bomb".

A look back at the recent past, as chart 1 shows, if the aggregate level of total outstanding debt and liabilities of all states, as a percentage of GDP is taken, the states have reduced their debts. However, the pace of improvement seems to have stalled since financial year 2012-13.

For the most part, state finances have gained because of improved revenue receipts and increased transfers from the Centre, as shown by chart 2. However, an improvement in the states' own tax revenues, which has been a key contributor.

As such, state-level gross fiscal deficits have worsened over the past few financial years, as shown by chart 3. It is crucial to note that these numbers do not include the impact of the increased debt burden on account of the Ujwal Discom Assurance Yojana (UDAY). Moreover, they are in spite of improved transfers in the wake of the Fourteenth Finance Commission's recommendations.

And that is why, notwithstanding the Budget estimates for the current financial year, gross fiscal deficits at the state level will be adversely affected further - partly because of the increased debt on account of Uday and partly due to the increased burden owing to the potential salary hikes at the state level in response to the Seventh Central Pay Commission award. As chart 4 shows, together these two factors could lead to an uptick of 0.3 percentage points in the fiscal deficit, pushing it to 2.9 per cent of gross state domestic product. This is a conservative estimate and some other estimates, such as the one by Nomura, expect the eventual fiscal deficit of states to climb up to 3.3 percent of GSDP in FY17.

Data at the level of individual states throw up a mixed picture,according to chart 5, even though several states expect to do better in the current financial year. However, a lot would depend on the size of UDAY debts in a particular state and the rollout timeline for increased salaries of state employees.