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.
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