Four states — Manipur, Nagaland, Punjab and Arunachal Pradesh – have a high debt to gross state domestic product (GSDP) ratio of over 40 per cent which raise a red flag, says a study by Bank of Baroda (BoB).
A high debt to GDP ratio indicates that debt and GDP of those economies are not well balanced and they don’t produce goods and services sufficient to pay back debts without incurring further debt.
Punjab which has the highest size of the budget has a debt to GSDP ratio of around 47 per cent. Manipur has the ratio at 40 per cent, Nagaland 42 per cent and Arunachal Pradesh 53 per cent, according to a study by Bank of Baroda.
There are only 3 states which have a debt-GSDP ratio of less than 20 per cent. “When the country is aiming to bring down the aggregate ratio to 20 per cent intuitively it can be seen that this will take a lot of time. Odisha, Gujarat and Maharashtra are the prime performers here,” BoB study said.
There are another 4 states, Karnataka, Telangana, Assam and Chhattisgarh which are at a level of less than 25 per cent, while 5 others, Tamil Nadu, Haryana, Jharkhand, Uttarakhand and MP have ratios between 25-30 per cent, it said.
The balance 15 states have ratios above 30 per cent and would need very strict fiscal monitoring to bring down the debt levels. This would require both lower fiscal deficits as well as higher growth in GSDP, BoB said.
A major issue that has been irking policy makers is the rising level of state debt. In FY23, based on the budgeted numbers, total liabilities of all states put together was projected at 29.5 per cent of GDP. In FY21 it had peaked at 31.1 per cent, BoB said, adding, “hence there has been some improvement.”
According to BoB study, on the side of fiscal deficit, 11 have targeted ratios of up to 3 per cent which indicates that they are confident of their finances and are also within control of their future debt levels. Gujarat has the lowest at 1.8 per cent and Maharashtra follows with 2.5 per cent.
Three states have fiscal deficit of 5 per cent and above. These are Punjab, Manipur and Arunachal. If this is juxtaposed with the debt ratios, it can be said that these states will have a challenging time in reducing their debt as they are still to rein in their deficits, BoB said.
There are 3 states that have fiscal deficit ratio of between 4-5.5 per cent and include Goa, Himachal and Sikkim. The balance 10 have ratios between 3-4 per cent (Rajasthan and MP are at 4 per cent), where it may be assumed that the additional space linked with reforms as laid down by the centre are being implemented, it said.
“While debt levels are the ones that are monitored on a regular basis, the contingency liabilities of government are also important. State run utilities especially in the areas of power, transport and irrigation are the ones relevant here. These units tend to subsidize their consumers in conjunction with the government and run high debt levels that are in turn guaranteed by the government,” the study said.
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These would be only contingency liabilities of the state as the entities are independent companies which borrow money, it said.
In outstanding guarantees, the states of Andhra and Telangana have been most aggressive and post the carving of two states have dealt actively outside the Budget. UP, Tamil Nadu, Rajasthan and Kerala also have high levels of guarantees with concentration in the power sector (UDAY has been partly successful in migrating contingent liabilities on to the books of the state), BoB study said.
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Punjab, Mizoram, Sikkim are other states that have given high levels of guarantees to their commercial entities. “This is another aspect of debt that has to be monitored because while the probability of invocation of guarantees is low, it pressurizes the states nonetheless and is not looked upon positively in the context of fiscal prudence,” it said.
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