RBI REPORT ON STATE GOVERNMENTS DEBT
1. Context
The Reserve Bank of India released its report on state government budgets for 2022-23.
2. Key Findings of the RBI report on state Government Debt
2.1 Debt-to-GDP
- The state debt-to-GDP ratio remains uncomfortably high. As per the report, the debt-to-GDP ratio has fallen from 31.1 per cent in 2020-21 -a year when states had struggled to manage the economic fallout of the pandemic -to 29.5 per cent in 2022-23.
- To put this number in perspective, the Fiscal Responsibility and Budget Management(FRBM) review committee headed by N K Singh, had recommended a debt-to-GDP ratio of 20% for states.
- A high debt-deficit burden leaves little room for states to manoeuvre when faced with the next economic shock.
- A high debt burden may also imply that states may have to pay more to service their obligations.
- As per the report, interest payments by states rose to 2 per cent of GDP in 2020-21, up from 1.7 per cent in 2017-18. States expect this to come down to 1.8 per cent in 2022-23.
- Punjab, Tamil Nadu, Haryana and West Bengal have the highest interest payments to revenue receipts ratio.
2.2 Contingent Liabilities
- State governments have also seen a significant expansion in their contingent liabilities.
- Contingent liabilities here refer to the obligations of a state government to repay the principal and interest payments in case a state-owned entity defaults on a loan.
- As per the report, the guarantees issued by state governments have risen from Rs 3.12 lakh crore or 2 per cent of GDP in 2017 to Rs 7.4 lakh crore or 3.7 per cent of GDP.
- The disaggregated data shows that the states of Andhra Pradesh, Telangana and Uttar Pradesh have the most guarantees outstanding at the end of March 2021.
2.3 Old Pension Scheme
- In the early 2000s, there was a growing realization that financing the old pension scheme would prove to be challenging.
- Thus, a new pension framework was ushered in which would limit the financial burden of the state.
- While most states had then signed on to the new pension scheme, some states such as Rajasthan and Chhattisgarh have now chosen to revert.
- This will have adverse implications for state finances. States already allocate a significant portion of their own tax revenues towards pension — in 2020-21, Rs 3.86 lakh crore was allocated towards pension.
- Hence, shifting back to the old pension scheme will only end up increasing pension liabilities, leaving even less room for more productive spending.
For Prelims
| For Prelims:Reserve Bank of India (RBI), Gross Fiscal Deficit (GFD), Informal sector, A Study of Budgets of 2022-23, Fiscal Responsibility and Budget Management (FRBM), Old Pension Scheme. |
Source: The Indian Express
