Indian states, indebted in plain sight
They are slipping on fiscal responsibility, piling up liabilities
In the 6th century BCE, Athenians elected Solon to solve the city-state’s debt crisis. Solon’s reforms led to the abolition of debt slavery and restructured society. In the late nineteenth century, Egypt lost control of state resources to debt. The Ottoman Empire defaulted on its debt around the same time: a crisis that contributed to its demise ultimately.
As the pandemic wanes after two years, countries are counting the cost of debt they took to fund fiscal packages. Sri Lanka’s financial crisis prompted the Reserve Bank of India (RBI) to look at the debt of the country’s states.
Of the 17 states for which RBI data is available, all but three are set to exceed their outstanding liabilities or debt target of 20 per cent gross state domestic product (GSDP) to be achieved by 2022-23, as per the recommendations of the Fiscal Responsibility and Budget Management Review Committee.
It will not be any better for the next four years, at least. The aggregate debt to GSDP ratio of all states will increase to 27 per cent in 2026-27, compared to 26 per cent in 2019-20. Five states shall exceed the 32.5 per cent target set for 2025-26 by the fifteenth finance commission.
The current method of calculating debt to GSDP ratio may not present a correct picture, and the total liabilities of states are higher, a ‘Business Standard’ analysis found. A standard calculation of a state’s public debt considers outstanding liabilities, including loans from the central government, market borrowings, state development loans, etc. It doesn’t consider loans taken by state public sector undertakings (PSUs), which also hold sovereign guarantee. Neither does it consider the debt of power utilities, popularly called discoms. Such guarantees by PSUs and discoms have grown considerably. Andhra Pradesh government’s outstanding loan guarantees have increased 11 times in five years. For Bihar, the rise has been five times.
If such guarantees are considered, the debt to GSDP ratio jumps ten percentage points for Andhra Pradesh and three percentage points for Bihar. In the case of Andhra Pradesh, the discom debt alone would add two percentage points to the state’s debt to GSDP ratio.
The other problem is interest payments. The interest cost for states has doubled over the last six years. It accounted for 27 per cent of states’ own tax revenue in 2021-22. The number was 25.7 per cent in 2015-16.
As states demand further easing of borrowing limits, they need to present a clearer picture of their debt. The central government needs to do that too.