State’s outstanding debt a concern

State’s outstanding debt, largely dominated by market borrowings, is expected to reach 75% of Gross Domestic Product (GDP) by the end of March 2021.

The alarming status of the State’s finance, along with the spread of the pandemic, has been detailed by the Reserve Bank of India (RBI) in its recent report, ‘State Finances: A study of budgets of 2020-21’.

According to the RBI, there is a compositional shift towards market borrowings after the recommendation of the 14th Finance Commission to exclude States from the National Small Savings Funds (NSSF) financing facility.

Risk factor

Capital Expenditure (CapEx) was also hit owing to the sudden changes in prioritisation of spending. During April-June period of 2020, revenue spending rose 12% when revenue receipts were down by 21%. This links to the risk factor for capital spending — rising debt to Gross State Domestic Product (GSDP) ratio — of States.

To keep revenue expenditure at budgeted levels when revenue receipts are falling, States are borrowing more from the market this year. For 19 States, the debt-GSDP ratio is expected to exceed 25% in 2020-21, which may force curtailment of capital expenditure.

Further, the loans from the Union government to partially make good the shortfall in Goods and Services Tax (GST) compensation will add to the interest outgo of the States, putting a new pressure point on State finances.

The sharp increase in the indebtedness of States owing to COVID-19 poses a risk to their finances, as per the RBI report. States have budgeted their consolidated gross fiscal deficit (GFD) at 2.8% of GDP in 2020-21, however, the pandemic may alter Budget estimates significantly.

The average GFD for States that presented their Budgets before the pandemic is 2.4% of GSDP while the average for Budgets presented post-lockdown is 4.6%.

States may see a massive cut in capital expenditure in 2020-21 owing to the revenue impact of the pandemic. “Sustaining the recovery from the pandemic will reshape State finances, entailing boosting investment in health-care systems and other social safety nets in line with the States’ demographic and co-morbidity profiles,” it said.

The State governments’ finances have taken a body blow in the first half of 2020-21 and their GFD is projected to widen beyond 4% of GDP in 2020-21. The dual impact of the compression in tax receipts and higher expenditure has generated unprecedented pressures on fiscal positions at sub-national levels.

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Printable version | Jan 18, 2021 8:05:57 AM |

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