Twelve of 31 states, UTs project debt more than 35% of GSDP at FY24 end

It is not that only the poor states such as Bihar have high debt in proportion to their GSDP

More than 33 per cent of India’s constituent units, the states and Union Territories with legislature, have projected their debt to cross 35 per cent of their respective gross state domestic product (GSDP) at the end of 2023-24.

Twelve states -- Arunachal Pradesh, Bihar, Goa, Himachal Pradesh, Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Punjab, Rajasthan, and West Bengal -- have caught the eye of the Reserve Bank of India (RBI) because of their fiscal mismanagement.

The RBI in its latest annual publication has warned that any additional allocation for non-merit goods and services, subsidies, transfers, and guarantees could jeopardise the fragile fiscal situation of these states, potentially disrupting the fiscal consolidation achieved over the past two years.

These states have projected their fiscal deficit surpassing 4 per cent of their respective GSDP this financial year.

None of the Union Territories has projected its debt to cross 35 per cent of GSDP. If these -- Jammu and Kashmir, Delhi, and Puducherry -- are taken out of the list, 42 per cent may have their debts above 35 per cent of respective GSDP at the end of this financial year.

However, the number of states having this high proportion of debt has come down since Covid-hit 2020-21. Sixteen states had this kind of high debt at the end of FY21. That came down to 13 the next year. Now, it is 12, according to the Revised Estimates for 2022-23 and Budget Estimates for 2023-24.

Andhra Pradesh, Jharkhand, Tripura, and Uttar Pradesh are no longer in this category. But all of them barring Uttar Pradesh have projected their debt to cross 30 per cent of GSDP at the end of the current financial year. Uttar Pradesh has projected bringing it down to 28.6 per cent in FY24 from 30.7 per cent a year ago.

Collectively all states and Union Territories have projected their debt-GSDP ratio to inch up to 27.6 per cent at the end of 2023-24 as against 27.5 per cent in 2022-23 (Revised Estimates).

High debt eats into the resources of states, leaving little for capital expenditure. For instance, Punjab has projected interest payments constituting 22.2 per cent of its revenue receipts this financial year. For West Bengal it is 20.11 per cent, for Kerala 19.47 per cent, for Himachal Pradesh 14.6 per cent, and for Rajasthan 13.8 per cent.

It is not that only the poor states have high debt in proportion to their GSDP. Goa, which has the highest per capita income in the country, has projected its debt-GSDP ratio at 38.3 per cent at the end of 2023-24. The projected ratio is higher than the 35.2 per cent at the end of even the Covid-struck year of 2020-21.

Among Union Territories, Jammu and Kashmir and Puducherry have projected their debt to cross 30 per cent at the end 2023-24. With elections yet to be held in the former, it is the Centre which presents the Budget for it. Delhi is an outlier since it projected just debt to be 1.7 per cent of its GSDP at the end of 2023-24.

The RBI’s report -- State Finances: A Study of Budgets – has highlighted the medium-term challenges to fiscal sustainability and underscored the risks associated with some states contemplating a return to the old pension scheme (OPS).

It has warned such a shift could impose a substantial burden on state finances, limiting their capacity to undertake growth-enhancing capital expenditure.

The central bank’s estimates suggest that if all states revert to the OPS from the National Pension System (NPS), the cumulative fiscal burden could balloon to 4.5 times that of the NPS with an additional burden of 0.9 per cent of GDP annually by 2060.

Of the 12 states, Rajasthan and Himachal Pradesh have reverted to the OPS, while Punjab is in the process of doing so.