These Are India’s Most Fiscally Vulnerable States, Says RBI Report

Fiscal position of Indian states has deteriorated in 2020 with a decline in revenue, increase in spending and a rise in debt-to-GDP ratios, according to the Reserve Bank of India.

Based on the debt-gross state domestic product ratio in 2020-21, Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana have the highest debt burden, according to an analysis published in the central bank’s bulletin for June.

These 10 states account for around half of the total expenditure by all state governments in India, it said in the report published on Thursday.

Other vulnerability indicators also capture these 10 states in their cross hairs. Their gross fiscal deficit to nominal GDP ratio were equal to or more than 3% in 2021-22, besides deficits in their revenue accounts, barring in Uttar Pradesh and Jharkhand.

• Among the 10 states, Andhra Pradesh, Bihar, Rajasthan and Punjab exceeded both debt and fiscal deficit targets for 2020-21 set by the 15th Finance Commission.

• 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.

• Rajasthan, Kerala and West Bengal are projected to surpass the targets for debt and fiscal deficit in 2022-23.

The key macroeconomic risks facing the state governments currently arise from uncertainties surrounding the evolving Covid situation, spillovers from the Russia-Ukraine war operating through high global food and commodity prices, and the synchronised monetary tightening by central banks across the world.

Besides these macroeconomic shocks, the other potential sources of fiscal risk for the Indian states stem from declining own tax revenue, increase in expenditure following growing preference for distribution of “freebies”, relaunch of the old pension scheme, increased frequency of natural disasters, realisation of government guarantees extended to state-owned enterprises and rising overdues of loss-making power distribution companies, the RBI’s report said.

The recent reversal of positions on the old pension scheme by states such as Rajasthan and Chhattisgarh means that when state government employees who joined after 2004-05 under the NPS begin to retire from 2034 onwards, the adoption of the old pension scheme is likely to benefit the current generation at the expense of future generations, the report said.

• The central government’s GST compensation payout will come to an end in June 2022, reducing the headroom available for social sector expenditure, the report said.

• Contingent liabilities, too, have been rising, and have surpassed 5% of GSDP in states like Punjab, Rajasthan, Uttar Pradesh and Andhra Pradesh.

• Tamil Nadu, Madhya Pradesh, Rajasthan and Punjab are most vulnerable to a possible bailout of power distribution companies, while Gujarat, Assam, Haryana and Odisha are relatively insulated from this risk.

In the base case, for all the states taken together, the debt-GSDP ratio is projected to moderate between 2021-22 and 2026-27 because of the fiscal performance of a few states—Gujarat, Maharashtra, Delhi, Karnataka and Odisha. Most of the other states are likely to exceed the debt-GSDP ratio of 30% in 2026-27.

Punjab is expected to remain in the worst position as its debt-GSDP ratio is projected to exceed 45% in 2026-27, with further deterioration in its fiscal position. Rajasthan, Kerala and West Bengal are projected to exceed the debt-GSDP ratio of 35% by 2026-27. These states will need to undertake significant corrective steps to stabilise their debt levels, the cenral bank said.