Why State debt levels need a close watch

The recently concluded Assembly elections in Madhya Pradesh, Chhattisgarh, Rajasthan and Telangana witnessed high decibel campaigning by the incumbent governments as well as the parties in the Opposition to win over the electorate. With the Lok Sabha election just a few months away, such promises of doles are only set to increase.

It is natural to wonder about the effect of these promises on the finances of States and Union Territories. A closer look at numbers shows that some States have thrown caution to the wind this fiscal year, budgeting for debt to GSDP ratio much beyond the mandated level, while many others have managed to keep it within reasonable limits.

But there are several reasons why the borrowing numbers of States could be much higher than budgeted. One, many States are resorting to off-budget borrowing in the form of guarantees to State utilities which is not captured by their Budgets. Two, the projections made in many State Budgets are too rosy and the deficit and borrowing could be higher than the numbers in the budgets. Three, the bid to meet poll promises is likely to stretch the finances of many States.

Stretched borrowing

The FRBM review committee headed by NK Singh had stipulated that State debt should not exceed 25 per cent of GSDP. But due to excessive spending during the pandemic, not matched by commiserate growth in revenue, this ratio hit 31.1 per cent in FY21. While States did manage to rein it back to 29.5 per cent of GDP by 2021-22 it is still well above the preferred level.

There is a large variation in debt levels among States and UTs. A businessline analysis of State Finances of FY22 revealed that Punjab fared the worst in this metric with debt-to-GSDP ratio of 53.3, as per revised estimates. Punjab was followed by Rajasthan, Bihar, Kerala and West Bengal with the ratio between 34 and 39. Odisha, Gujarat and Maharashtra showed the lowest ratio implying that these States did not resort to too much borrowing, perhaps helped by strong growth in revenue.

The trend appears quite similar in the budgeted projections for 2023-24. Analysis of the budgets for 27 States by PRS Legislative Research, shows that Punjab continues to have the highest debt-to-GSDP ratio, above 46. States such as Rajasthan, West Bengal, Himachal Pradesh, Kerala and Bihar are also piling debt disproportionate to the size of their GDPs, with the ratio between 35 and 40.

Odisha, Maharashtra and Gujarat have once again budgeted for debt below 20 per cent of GSDP while States such as Tamil Nadu, Karnataka, Telangana and Chhattisgarh have their ratios close to the mandated 25 per cent.

But the budget debt numbers do not tell the complete tale.

The RBI as well as the CAG have flagged the increased risks from guarantees given by State governments to State public sector enterprises. State governments give guarantees to enable these PSEs, especially power and other utility companies, to borrow. But given the precarious finances of these PSEs, the loans guaranteed by the State governments can prove to be a pain point going ahead.

According to the RBI, these guarantees had hit a high of 3.7 per cent of GDP in 2021. But the guarantees have continued to rise in recent years too. Going by latest numbers (the numbers for FY22 and FY23 are not available for many States), guarantees given by States stands at ₹9.03-lakh crore in FY23, up from ₹7.4-lakh crore in FY21.

Uttar Pradesh has the highest outstanding guarantee at ₹1.53-lakh crore (2021 numbers), followed by Telangana with ₹1.35-lakh crore (2023), Andhra Pradesh with ₹1.17-lakh crore (2022), Tamil Nadu with ₹97,975 crore (2022) and Rajasthan with ₹82,613 crore (2023).

While these guarantees are not too big when seen as a percentage of GDP for States such as Maharashtra (1.3 per cent of GDP), Karnataka (1.9 per cent) and Gujarat (0.8 per cent), these could be problematic for States such as Telangana, Andhra Pradesh, Punjab and Rajasthan where guarantees are over 7 per cent of GDP. Their debt to GDP levels will increase substantially if these guarantees were also taken in to account.

Poll promises, rosy projections

Given the increasing debt levels and need to spend more during the election period, many States have made over-optimistic projections for nominal GSDP growth for FY24. businessline analysis showed that while the Centre has projected 11 per cent nominal growth for FY24, Uttar Pradesh is projecting GSDP growth of 19 per cent, Tamil Nadu, 14 per cent and Gujarat 13 per cent. Of the top 10 States, six are projecting growth at a higher rate than the Centre.

States have also projected unattainable tax revenue growth for FY24, given falling inflation, consumption slowdown due to rising interest rates and slowing exports. Telangana has projected own tax revenue growth of 18.48 per cent for FY24. Rajasthan is projecting own tax revenue growth of 23 per cent for FY24, led by growth in State GST collections of 36 per cent. Chhattisgarh has been relatively conservative, projecting own tax revenue growth of 15.9 per cent and SGST growth of 19 per cent this fiscal year.

The victory of BJP in the three Northern States removes the threat to State fisc from reverting to the old pension scheme. But the winning parties have not held back in luring voters with carrots. Some of the poll promises such as increase in MSP on wheat and paddy, higher subsidy on cooking gas cylinders, more financial assistance to farmers and lower fuel prices in Rajasthan are going to increase the fiscal stress in these States.

In a federal structure, prudent fiscal management of States is as important as the management of Central finances. Attention of the media and analysts needs to be drawn to the Budgets and fiscal management of States. Greater public awareness could be one way to check the more fiscally profligate States.

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