Economic Highlights

New Delhi, 27 February 2023

Rs 76 Tr States’ Debt

DISCOMS DUMP HEAVY LOSSES

By Shivaji Sarkar 

The Reserve Bank of India has red flagged states’ debt touching critical high of Rs 76.10 tr (trillion) and classified debt liabilities of five states - Bihar, Kerala, Punjab, Rajasthan, and West Bengal – which is no longer sustainable. The Northeast states have the lowest. Ten states are the worst defaulters. The state debt in 2013 was Rs 22.44 trillion (tr). This is in addition to Rs 155.77 tr central debt as on 31 March 2023, and is expected to go up to Rs 172.5 tr on 31 March 2024. 

The RBI has called for deep introspection and immediate corrective steps. Among the reasons cited for the crisis is slowdown in tax revenue and rising expenditure on non-merit freebies; expanding contingent liabilities; and worse the ballooning of over dues of private power distribution companies (Discoms). 

The RBI has lambasted the practice of infusing capital and giving subsidies to the Discoms. At least thrice major states have bailed out Discoms. Indirect bailing out and taking over their losses is usual. The Power sector, it finds is mismanaged and has become a major liability. The sector accounts for much of the financial burden of state governments in India, both in terms of subsidies and contingent liabilities. At same time, it has substantial repercussion for state finances. 

The RBI warning on power situation apparently is in the context of moving every activity on electricity from railways, buses, and cars to many others. It calls for immediate corrective measures. However, neither does it speak of the high pricing of electricity and other utilities nor does it mention high road toll rates and consequent inflation. 

The highest debt-infested states are Haryana Rs 2.87tr, Uttar Pradesh Rs 7.1 tr, West Bengal Rs 6.08 tr, Kerala Rs 3.91 tr and Punjab Rs 3.05 tr, Maharashtra 6.80 lakh cr, Karnataka 5.35  Andhra Pradesh Rs 4.42 tr, Gujarat 4.23 tr, Rajasthan Rs 5.37 tr, Bihar 2.86 lakh cr, Jharkhand Rs 1.29 tr. The debt-GSDP ratio of the stressed states is to fall beyond 35 per cent by 2026-27. 

States such as Bihar, Kerala, Punjab, Rajasthan, and West Bengal are classified as the most stressed in terms of their finances and liabilities. The tax revenues of some of the 10 states, including Madhya Pradesh, Punjab, Haryana, Andhra Pradesh and Kerala, have been declining. For most of these states, non-tax revenue dropped significantly in recent years forcing them to resort to higher market borrowings. 

The lowest debts are with North-East states -- Assam Rs 1.21 tr, Arunachal Pradesh Rs 15917 crore, Meghalaya Rs 17433 crore, Mizoram Rs 12991crore, Nagaland Rs 16562 crore, Sikkim Rs 12982 crore and Tripura Rs 26446 crore. 

The Central bank criticises the states for doling out high subsidies, particularly free electricity, free water, free public transportation, waiver of pending utility bills and farm loan waivers. The RBI has not included corporate doles in its deliberations. As per CAG, state subsidies grew at 12.9 per cent in 2021-22 and 11.2 per cent during 2020-21, after contracting in 2019-20.  Gujarat, Punjab and Chhattisgarh spend more than 10 per cent of their revenue on subsidies. Average subsidies are at 8.2 per cent in 2021-22 having risen from 7.8 per cent in 2019-20. Jharkhand, Kerala, Odisha, Telangana and Uttar Pradesh are the top five states with the largest rise in subsidies over the last three years. 

Committed expenditure like interest payments, pensions and administrative expenses, accounts for a significant portion (over 35 per cent) of the total revenue expenditure in states like Haryana, Uttar Pradesh, West Bengal, Kerala and Punjab, leads to lower expenses on developmental activities. 

State finances are vulnerable to a variety of unexpected shocks that might alter their fiscal outcomes, causing slippages in their overall performance. Shocks may increase their debt by a significant amount, posing fiscal sustainability challenges. Among the five most indebted states, Punjab and Rajasthan appear to be most vulnerable to fiscal shocks arising out of realisation of contingent liabilities. Financial restructuring or bail-out of ailing Discoms could have severe impact on the debt-GSDP ratio of these two states. 

Taking into account the warning signs flashing from all the indicators, Andhra Pradesh, Bihar, Rajasthan and Punjab exceeded both debt and fiscal deficit targets for 2020-21 set by the 15th Finance Commission (FC-XV). Kerala, Jharkhand and West Bengal exceeded the debt target, while Madhya Pradesh overshot the fiscal deficit target. Haryana and Uttar Pradesh were exceptions as they met both criteria. 

According to the RBI, the debt level will remain higher than Fiscal Responsibility and Budget Management (FRBM) stipulated 20 per cent. The states are anticipating an increase in non-tax revenue, which is generated from sources such as fees, fines, and royalties. The report notes that states are expecting to see an increase in revenue from various sources such as GST, excise duty and other taxes. 

The financial risks from freebies seem to be moderate in case of many states, except Punjab which spends a huge amount on provision of free utilities. It justifies it by saying that allocation to healthcare, education infrastructure can promote economic growth and development. The RBI has also proposed to establish a fund that would be used for buffer capital expenditure during periods of strong revenue growth. The state governments must restrict their revenue expenses by cutting down expenditure on non-merit goods in the near term. In the medium term, the states need to put efforts towards stabilising debt levels. 

In competitive politics, fiscal responsibility is largely ignored. Votes are better off than fiscal prudence. Of late, the spree of infrastructure spending has caused heavy burden on meager finances. The need for infra is there. The governments, however, have become reckless spenders even for ill-designed roads and retrospection is passé. Lobbies work to rob the states and the pressures created are a bit hard for the state governments to resist. This leads to many duplication, irrational constructions as the Delhi’s Ashram Chowk or NH9 witnessed. 

For transport linkages the metro, its space guzzling stations and other paraphernalia drain the states out. At least 11 cities’ metros remain unutilized and have failed. Easier and inexpensive options are shunned because of factors of rent seeking. More expensive a product, the higher is the rent. An immediate review and pause on infra can help the states cut debt. Even the RBI has chosen to ignore it. ---INFA

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