Fiscal risks seem ‘moving sub-national,’ says RBI

According to a RBI report, the most indebted states such as Punjab, Rajasthan and Bihar are expected to remain stressed, with their debt-GSDP ratios likely to exceed 35% by 2026-27.

Key highlights

• Risks to state government finances arise from macroeconomic uncertainty, declining own tax revenue, re-launch of the old pension scheme by some states, rising expenditure on non-merit freebies, expanding contingent liabilities and the ballooning overdue of discoms, warranting strategic corrective measures, the RBI said in its July bulletin.

• According to the revised estimate, debt-GSDP of Punjab was the highest at 53.3%, followed by Rajasthan at 39.5%, Bihar (38.6%), Kerala (37%) and West Bengal (34.4%).

• In 2017, the N K Singh-led Fiscal Responsibility and Budget Management (FRBM) committee had suggested a debt-GSDP ceiling of 20% for the states.

• Financial restructuring or bailout of ailing discoms will have the most severe impact on debt-GSDP ratios.

• Before the pandemic, the combined gross fiscal deficit (GFC) of the state governments remained modest at 2.5% of GDP (during 2011-12 to 2019- 20), lower than the Fiscal Responsibility Legislation (FRL) ceiling of 3%.

• With the onset of the pandemic, states’ fiscal position deteriorated in 2020-21.

• With a decline in revenue and increase in spending, the fiscal deficit widened to 3.5% of GDP in the revised estimates for 2021-22.

• States’ outstanding debt at end-March 2022 stands at 31.2% of GDP, which is the highest in the past 15 years.

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