STATES’ DEBT PROJECTION AND FISCAL SITUATION

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TAG: GS 3: ECONOMY

THE CONTEXT: Amid higher capital expenditure and moderate revenue growth this fiscal year, state’s debt will remain higher at 31-32 per cent of their gross domestic product.

EXPLANATION:

• As per the Crisil rating report, the current situation is likely to take overall borrowings to ₹87 lakh crore, up 9 per cent this year.

DEBT PROJECTIONS AND STATE FISCAL HEALTH

• Debt- gross state domestic product (GSDP) Ratio:
  • Indebtedness of a state is measured as the ratio of its debt to gross state domestic product (GSDP).
  • States’ debt projected at 31-32% of Gross Domestic Product (GDP) in FY24.
  • Increase from pre-pandemic levels of 28-29%.
• Fiscal Responsibility and Budget Management Act:
  • Gross fiscal deficit (GFD) expected at 2.5% of GSDP, below the mandated level of 3%.

FACTORS INFLUENCING HIGH DEBT LEVELS

• Revenue Growth Challenges:
  • States anticipate modest revenue growth, hindering fiscal stability.
• Capital Expenditure (Capex) and Borrowing:
  • Increased borrowing due to higher capital outlays.
  • Committed expenditure on salaries, pensions, and interest adds to borrowing pressure.
• Expenditure Structure:
  • Majority of revenue allocated to committed expenditure, limiting fiscal flexibility.

IMPACT OF REVENUE AND EXPENDITURE PROJECTIONS

• Expected Revenue Growth:
  • Predicted 6-8% growth, supported by GST collections and Center’s devolutions.
• Rising Expenditure:
  • Anticipated 8-10% rise in revenue expenditure.
  • Emphasis on social welfare and public health, comprising 65% of total spending.

ANALYSIS OF FISCAL DEFICIT AND BORROWING TRENDS

• Projected Fiscal Deficit Increase:
  • Anticipated rise in revenue deficit to 0.5% of GSDP from 0.3%.
• Borrowing Requirements:
  • Estimated 18-20% increase in capital outlays, necessitating higher borrowings.
• Interest-free Centre Loans:
  • ₹1.3 lakh crore interest-free loans from Center to aid capital outlays.

EXPECTED BORROWING AND DEBT SCENARIO

• Borrowing Increase Overview:
  • Predicted overall borrowings to surpass ₹87 lakh crore, up 9%.
• State Development Loans:
  • State development loans, 65% of total borrowings, rose by 28% between April and November.
• Off-Budget Debt Funding:
  • Off-budget debt funding set to rise by ₹7.5 lakh crore this fiscal.

RISK FACTORS AND FUTURE OUTLOOK

• Economic Activity Impact:
  • Potential risk of GSDP reduction due to economic slowdown.
• Potential Positive Influences:
  • Better tax buoyancy or increased support from the Centre could provide liquidity support to states.

CONCLUSION

• Persisting Debt Challenges:
  • States’ indebtedness likely to remain at 31-32%.
• Balancing Fiscal Health:
  • Challenges persist due to borrowing for capital outlays and limited revenue growth.
• Dependency on External Factors:
  • State fiscal health dependent on economic activity and external support mechanisms.

SOURCE: https://www.livemint.com/economy/states-debt-to-remain-high-at-31-32-per-cent-of-their-gdp-in-fy24-amid-higher-capex-moderate-revenue-growth-11701425176025.html