The Reserve Bank of India’s annual study on state budgets underlines weaknesses in financial position of states.
A large number of states are running fiscal deficit beyond the upper limit of 3 per cent of gross domestic product, laid down by the Fiscal Responsibility and Budget Management (FRBM) framework (Chart 1). Moreover, most of them are laggards in terms of per capita income levels. Owing to the tight revenue situation and the pressure on exchequer emanating from power utilities and farm sector support (loan waivers and income support), states are being compelled to borrow more (Chart 2). The RBI study shows that the aggregate debt level could go beyond 25 per cent of GDP in the current year itself if off-budget guarantees are taken into account. Notice that debt level surged after 2016-17 due to UDAY.
This has put limitations on development-related spending, as interest payments and other compulsory spending is set to grow faster than capital expenditure this year (Chart 3). Higher debt levels are associated with lower economic growth, the study shows (Chart 4).
To make the debt sustainable, revenues need to grow at 14 per cent per year, higher than what the last three years have achieved.
Though revised estimates for 2018-19 show a higher growth, provisional actuals show a drop. Higher budgeted growth in 2019-20 has been flagged down by near stagnation in the financial year to date. The debt requirement is increasingly being catered to by market borrowings (Chart 6). But the market for state government bonds is too illiquid to be attractive with trade happening only for less than a third of trading days in several states (Chart 7).
As a result, foreign investors have stayed away from state government bonds. This financial year, FPI’s have put money in less than 3 per cent of the available limit to invest (Chart 8).
StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines; Source: State finances report, RBI; Compiled by BS Research Bureau