The debt position of some States continues to show signs of fiscal stress and increasing debt burden. The recent slowdown in growth momentum, which is likely to affect the revenue-raising capacity of the state governments, may lead to further deterioration in debt position of these states.
Stating this, a working paper of the Reserve Bank of India titled `` >Debt sustainability at the State level in India ’’ sounded a warning that the contingent liabilities, primarily in the form of issuance of guarantees by the state governments, remained an area of concern. ``The strong presence of contingent liabilities calls for a holistic assessment of debt position of states by reckoning their off-budget fiscal position, including the impact of operations of state public sector enterprises,’’ it said.
Going forward, there could be downside risks in case the slowdown in growth momentum observed during the last two years persisted, with its likely adverse implications for the revenue-raising capacity of the state governments. Hence, the state governments ``will have to keep their primary expenditure under control in order to avoid their increasing dependence on borrowed funds,’’ the RBI paper said.
Improvement
The debt position of state governments deteriorated sharply between 1997-98 and 2003-04. It witnessed a significant improvement from 2004-05 onwards, however. ``This has been attributed, among others, to the implementation of fiscal rules through the enactment of Fiscal Responsibility and Budget Management (FRBM) Acts/Fiscal Responsibility Legislations (FRLs) at the state level in early 2000s,’’ the paper said.
Karnataka was the first to enact its FRBM Act in September 2002, followed by Kerala (2003), Tamil Nadu (2003) and Punjab (2003). Other states also adopted these legislations to avail themselves of the benefits under the incentive scheme recommended by the 12th Finance Commission. The adherence to these legislation was also supported by the implementation of Debt Swap Scheme (DSS) from 2002-03 to 2004-05 and Debt Consolidation and Relief Facility (DCRF) from 2005-06 to 2009-10. These two debt restructuring schemes provided debt relief through debt consolidation, and reduced the interest burden on the states.
In addition, a turnaround in interest rate cycle also contributed to a gradual reduction in effective interest rates and debt servicing costs during this period. These developments were mirrored in lower debt-GDP ratio at 26.6 per cent in end-March 2008, before declining further to 21.7 per cent in end-March 2013. However, at a disaggregated level, the debt-GSDP ratio was higher than 30 per cent level in Punjab, Uttar Pradesh and West Bengal, while it exceeded 25 per cent level in Goa and Kerala. Odisha recorded a remarkable improvement in its debt-GSDP ratio during the period 2004-05 to 2012-13.
Captive market
A disaggregated state-wise position in respect of various debt sustainability indicators for 17 non-special category states revealed that most of the states had met two of the debt sustainability conditions during (2004-05 to 2012-13. For instance, during this period, the rate of growth of public debt was lower than the growth rate of nominal GSDP for all the states except Jharkhand. Similarly, the rate of growth of GSDP was higher than the effective interest rate in all the states. However, the third condition, i.e., the rate of growth of public debt should be lower than effective interest rate, was met by only two states, viz., Bihar and Odisha.
From 1988-89 onwards, the weighted average yield on state government securities had been marginally higher than that on the Central government securities. Before this period, these loans were intermediated by the Central government. The ownership pattern of state government securities indicates a pre-dominance of commercial banks, although their share in total outstanding state government securities has declined steadily from 78.5 per cent in end-March 1991 to 61.9 per cent in end-March 2000 and further to 51.1 per cent in end-March 2012.
The share of insurance companies has, however, increased significantly during the same period. This is indicative of captive market for state government securities and preference of long-term investors for these securities due to higher yield vis-a-vis that on the Central government securities.
There was evidence of a captive market for state government securities and long-term investors for these securities due to their higher yield. This suggested that the investors perceived their investment in state government securities to be credit-risk free. ``The state-specific fiscal performance- related risk factors are presumably not being factored in by the investors.
