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Kerala among 5 Indian States highly indebted, RBI reminds of Sri Lankan crisis

Own tax revenue of Haryana, Kerala and Andhra Pradesh constitutes about half of their total revenue collections.

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Thiruvananthapuram: In the backdrop of the economic crisis in Sri Lanka, an article by the Reserve Bank of India (RBI) has put the spotlight on heavily indebted Indian States, Kerala, West Bengal, Bihar, Punjab and Rajasthan.

The fiscal health of Indian states warrants a careful assessment said the article that assesses the financial health of Indian states in terms of various vulnerability indicators.

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Based on the debt-GSDP ratio in 2020-21, Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana turn out to be the states with the highest debt burden.

Up to the onset of the pandemic, the average GFD-GDP1 ratio of the states remained modest at 2.5 per cent during 2011-12 to 2019-20, lower than the Fiscal Responsibility Legislation (FRL) ceiling of 3 per cent.

There were, however, substantial inter-state variations – while Andhra Pradesh, Kerala, Punjab and Rajasthan incurred average GFD of above 3.5 per cent of GSDP, Assam, Gujarat, Maharashtra, Odisha and Delhi ran ratios less than 2 per cent.

States’ fiscal positions deteriorated sharply in 2020 with a sharp decline in revenue, an increase in spending and a sharp rise in debt to GSDP ratios.
A major motivation for undertaking this analysis is the unfolding of the crisis in Sri Lanka, which has culminated in its first-ever debt default on May 19, 2022.

The Sri Lankan economy was battered by the pandemic, as travel restrictions hit tourism; exports of textiles, garments and tea suffered a setback due to a pandemic-driven slump in global trade; and remittances were impacted by the global growth slowdown.

Apart from the pandemic, public policies also contributed to the crisis – a sharp cut in direct and indirect taxes just before the pandemic; a shift to organic farming by imposing a total ban on the use of chemical fertilizer and pesticides to save on fertilizer subsidy, but with a severe effect on rice output and productivity of the plantation sector that resulted in a spike in food inflation and shortages of essentials; and ambitious infrastructure projects funded by costly Chinese debt.

The 10 Indian states account for around half of the total expenditure by all state governments in India. Other vulnerability indicators also capture these 10 states in their cross hairs.

Their GFD-GSDP ratios were equal to or more than 3 per cent in 2021-22, besides deficits in their revenue accounts (except Uttar Pradesh and Jharkhand).

Moreover, the interest payment to revenue receipts (IP-RR) ratio, a measure of debt servicing burden on states’ revenues, in 8 of these states was more than 10 per cent.

Taking into account the warning signs flashing from all the indicators, one can identify a core subset of highly stressed states from among the 10 states identified by the necessary condition i.e, the debt/GSDP ratio, it said.
The highly stressed states are Bihar, Kerala, Punjab, Rajasthan, and West Bengal.

Among the ten states, 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. Rajasthan, Kerala and West Bengal are projected to surpass the FC-XV targets for debt and fiscal deficit in 2022-23 (BE).

The ten selected states account for around half of the total revenue collected by all states and UTs. Their total revenue comprises tax revenue, non-tax revenue and central transfers, i.e., share in central taxes and grants.

Own tax revenue of Haryana, Kerala and Andhra Pradesh constitutes about half of their total revenue collections. The major source of revenue of other states is central transfers.

Within own tax revenue, states’ goods and services tax (SGST), states’ excise duties and sales tax are the major sources of revenue.
The own tax revenue of some of these 10 states, viz., Madhya Pradesh, Punjab and Kerala, has been declining over time, making them fiscally more vulnerable.

For most of these states, non-tax revenue has remained volatile, dropping significantly in recent years.
The decline in non-tax revenue is under general services, interest receipts and economic services. The declining own tax revenue and non-tax revenue affect the states’ expenditure planning and increase their dependence on market borrowing.

The 10 states identified by the vulnerability indicators account for around half of the total expenditure by all states and UTs.
The share of revenue expenditure in total expenditure of these states varies in the range of 80-90 per cent. Some states like Rajasthan, West Bengal, Punjab and Kerala spend around 90 per cent on revenue accounts.
This results in poor expenditure quality, as reflected in their high revenue spending to capital outlay ratios.

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