Relative to their GDP, states' liabilities moderating after pandemic

Absolute numbers have shown double-digit growth in recent years

Finance Minister Nirmala Sitharaman this week gave Parliament data on state debts, marking an increase in the absolute value of outstanding liabilities of states.
 
Tamil Nadu has the highest outstanding liabilities, of Rs 7.5 trillion in 2022-23. Uttar Pradesh had the second largest, of Rs 7.1 trillion. Maharashtra (Rs 6.8 trillion), West Bengal (Rs 6.1 trillion) and Rajasthan (Rs 5.4 trillion) are other large borrowers.
 
While many states have seen an increase in absolute debt numbers, their liabilities are moderating relative to the size of their economies.
 
State liabilities were the equivalent of 31.08 per cent of gross domestic product (GDP) in 2020-21 when the pandemic squeezed finances, showed data from the Centre for Monitoring Indian Economy (CMIE). Liabilities declined to 28.71 per cent in 2021-22 and are expected to be 27.87 per cent in 2022-23. The projection would be higher than the pre-pandemic figure of 25.33 per cent in 2018-19. In recent decades for which data is available, liabilities were highest in 2003-04 at 32.9 per cent. This is despite state government liabilities growing in double-digits (12 per cent) for the eighth year in a row and reaching Rs 76.1 trillion in 2022-23, the highest in data going back to 1980-81 (chart 1).


 

Mizoram is expected to have the highest outstanding liabilities relative to gross state domestic product (GSDP) for 2022-23 at 53.1 per cent, compared to 34.9 per cent in 2018-19. Punjab will be next, with a ratio of 47.6 per cent. It was 41.4 per cent in 2018-19.

States lack elbow room in terms of money available for development needs, though this has been the case even before the pandemic. Much of this is to do also with their high pension and salary bills, in addition to interest payments. On average, states spend 54 per cent of their revenue receipts on committed expenditure, according to data from the State of States Finances 2022-23 report by PRS Legislative Research.

Such expenditure includes payment of salaries, pensions and interest payments. More than half of the money that states earn goes on fixed payments, leaving little for building roads, bridges and developmental goals.

Out of 26 states, only nine spent less than 50 per cent of their revenue receipts towards committed expenditure in 2022-23. Himachal Pradesh recorded the highest at 77 per cent, followed by Kerala (71 per cent), Punjab (70 per cent), Tamil Nadu (68 per cent), and Nagaland (67 per cent).

Manipur spent the lowest at 36 per cent (chart 2).