State Finances and Public Debt in India
The fiscal health of Indian states is crucial, as they account for a significant portion of the country's public debt and government expenditure. A recent study by the National Council of Applied Economic Research highlights the growing public debt issues at the state level, which demand attention alongside the Union Budget.
Key Findings
- States manage about one-third of India's public debt and two-thirds of general government expenditure.
- The debt to Gross State Domestic Product (GSDP) ratio has increased in most states from 2012-13 to 2022-23, except for Gujarat, Odisha, West Bengal, and Maharashtra.
- Punjab and Himachal Pradesh have the highest debt burdens, exceeding 40% of GSDP.
- By 2027-28, four states are projected to have debt ratios above 40%, with Punjab's debt exceeding 50% of GSDP.
- The NITI Aayog's Fiscal Health Index (FHI) shows Odisha as the best-performing state, while Punjab ranks the lowest.
Impact of Debt on Development
- High debt levels lead to significant debt-service obligations, reducing states' ability to invest in education and infrastructure.
- States with lower debt manage finances better, allowing more spending on essential services and developmental projects.
Fiscal Rules and Market Interventions
- States struggle to comply with fiscal rules targeting revenue deficit, fiscal deficit, and outstanding liabilities, with an average compliance of 60%.
- Kerala and West Bengal have particularly low compliance rates, at 10% and 19%, respectively.
Challenges and Recommendations
- The aggregate debt-to-GDP ratio of state governments is 28.5%, exceeding the 20% limit recommended by the Fiscal Responsibility and Budget Management Review Committee.
- RBI interventions in bond markets lead to market indiscipline.
- States need to enhance revenue mobilization and consider strategies for managing high debt levels.
- Electoral cycles heavily influence state spending, often resulting in increased cash transfers and subsidies.
- Stricter rules are necessary to manage debt and deficits effectively.
