Rising Debt Of Indian States: Pandemic Has Further Strained Their Finances

The long period of pandemic has further strained the finances of the state govts. Almost all Indian states are in dire straits. A steep fall in the tax and non-tax revenue, and increase in pandemic-led additional expenditures, States had to rely on borrowings. This has overstretched the State finances pushing their gross fiscal deficit much higher.

Data compiled from the Comptroller & Auditor General (C&AG) show, the fiscal deficit of large States, in the first eight months of FY21, had crossed 70 per cent of their annual budget. Against a fiscal deficit budget of Rs 5.66 lakh crore for the whole of FY21, the actual deficit of these States has already touched Rs.3.89 lakh crore.

As a result, states have gone for heavy borrowing and are almost in debt trap. Tamil Nadu, UP, Maharashtra, Karnataka, Bengal and Rajasthan have been the top seven borrowing states, accounting for 52 per cent of the total borrowings. On an average, states have raised 97 per cent of the market borrowings as per the FY21 borrowing calendar .

The Reserve Bank of India in its latest report on State finances, points out that the gross fiscal deficit of State governments is projected to widen beyond 4 per cent of the GDP in 2020-21 compared with the budgeted 2.8 per cent. saThe Covid-19 pandemic may alter Budget estimates significantly, eroding the gains of consolidation secured in the preceding three years, says RBI.

States such as Haryana, Kerala, Telangana and West Bengal were showing improvement in their GFD as a percentage of gross state domestic product (GSDP) over the years. But the budgeted GFD-GSDP ratio of all the States is seen going completely off-track owing to the pandemic-led spike in expenditure and drop in tax and non-tax revenue.

Loss of revenue due to demand slowdown, coupled with heavy pandemic pending, are likely to keep these expenditures high, prolonging the ‘scissor effect’— loss of revenue accompanied with higher expenditure, the RBI said.

Though the GST compensation of Rs 1.1 lakh crore for States and Rs. 72,000-crore slippages on State GST will cut the overall deficit but rough estimates put overall deficit of states at Rs. 1.8 lakh crore. The fall in own revenue is estimated to be around Rs.70,000 crore.

As States are required to expand spending on healthcare to focus on vaccine delivery and to achieve the universal health coverage goal of 2.5 per cent of GDP at the aggregate level, so a conservative estimate of Rs 2.75 lakh crore expenditure outflow will take the State's fiscal deficit to over Rs 9 lakh crore or 4 per cent of India's GDP. Consequently, the combined fiscal deficit of Centre and States is estimated at 11.4 per cent for 2020-21. SBI's report puts the combined fiscal deficit at 12.1 per cent. Its much higher than what Union govt had budgeted a fiscal deficit of Rs7.96 lakh crore or 3.5 per cent of India's GDP estimate for FY21. For States and Union Territories (UTs), the fiscal deficit was budgeted at Rs.6.26 lakh crore, which is 2.8 per cent of the country's GDP.

It is not be noted that India has the highest sub-national debt among all BRICS nations.

In order to mobilize additional revenue sources to bridge their fiscal deficit, some states have increased taxes on alcohol and petroleum products and cutting down capital expenditures and deferring pension and subsidy payments, freezing dearness allowance (DA) and suspending leave encashment, among other measures.

Still States need higher sales taxes, VAT collection on petroleum products to reduce the slippages on the whole. Despite higher borrowing limits, States may not able to utilize the them fully due to stringent eligibility for the increased limits.

In any case, the higher borrowing is likely to further the debt burden of the States as it contains the huge outflow of interest liability. The ratio of outstanding liabilities of States has steadily increased from 22 per cent of the GDP at the end of March 2015 to 26.3 per cent as of March 2020. The outstanding liabilities of States and UTs is estimated to touch Rs 53.43 lakh crore as of March 2020, from Rs. 27.43 lakh crore in March 2015 .At the moment, there appears no way out.

The finances of States like Punjab and Himachal will be further strained after the implementation of the new pay scales for employees. Punjab govt has recently approved 2-fold salary hike for its 540,000 serving and retired employees,”employees putting an additional annual burden of Rs 4,700 crore.

(Chander Sharma With Inputs from Net)