Fiscal Challenges Gripping Indian States: A Closer Look at High Debt-to-GDP Ratios

India’s diverse states grapple with fiscal challenges, as several find themselves ensnared in a web of high debt-to-GDP ratios. The growing fiscal deficits, burgeoning debt burdens, and mismanagement of resources are key concerns that demand immediate attention. This article examines the fiscal predicament faced by states like Punjab, Kerala, Rajasthan, West Bengal, and Bihar, shedding light on the factors contributing to their high debt levels.

Punjab’s Debt Trap:
Punjab, facing a debt mountain exceeding ₹47,000 crore, confronts a severe fiscal crisis. A staggering ₹27,000 crore of fresh debt was incurred merely to service interest on existing borrowings. The state’s outstanding debt is over 46% of its GDP, far surpassing the recommended 20% by the NK Singh expert committee. With the Sixth Pay Commission arrears yet to be paid, Punjab struggles to rationalize freebies amid insufficient resources for capital investments.

Kerala’s Struggle for Fiscal Space:
Kerala, known for its extensive social welfare programs, finds itself battling against imposed borrowing limits by the Union government. With over 80% of revenue allocated to salaries, pensions, and interest payments, the state’s debt-to-GSDP ratio has risen to 39%. The delay in social security benefits raises concerns over fiscal sustainability, prompting the state to contest restrictions on its borrowing capacity in the Supreme Court.

Rajasthan’s Fiscal Stress:
Rajasthan faces fiscal stress with a debt-to-GSDP ratio hovering around 40%, surpassing the prudential level. The fiscal deficit is estimated at 4% for FY24, higher than the recommended 3% of GSDP. The state’s financial health may deteriorate further, raising alarms about the sustainability of its fiscal policies.

West Bengal’s Debt Management:
West Bengal, with a debt of Rs 5.86 lakh crore, emphasizes its successful reduction in the Debt-to-GDP ratio to 34%. While highlighting this achievement, the state acknowledges the per capita debt exceeding Rs 60,000. The delicate balance between debt reduction and sustaining economic development remains a key challenge for West Bengal.

Bihar’s Dependence on Central Transfers:
Bihar grapples with a debt-to-GSDP ratio of 38.7%, relying heavily on central transfers to sustain its economy. The state’s outstanding debt stands at about Rs 2.88 lakh crore, reflecting the challenges in generating sufficient revenue and reducing dependence on external support.

Common Challenges and Concerns:
These states share common challenges, with a significant portion of spending directed towards subsidizing electricity distribution companies (DISCOMs). One-fourth of the losses incurred by all-India DISCOMs are concentrated in these five states. The need to reduce DISCOM losses often entails tariff hikes, adding to the inflationary pressures.

The Urgency for Responsible Fiscal Management:
Ideally, states should allocate at least one-third of their expenditures towards development and infrastructure to spur economic growth. Deficit financing driven by excessive spending on salaries and subsidies jeopardizes responsible fiscal management, contributing to inflationary pressures. The RBI identifies additional states, including Uttar Pradesh, Andhra Pradesh, Haryana, Jharkhand, and Madhya Pradesh, as fiscally stressed, requiring strategic interventions for sustainable economic growth.

In conclusion, addressing the fiscal challenges faced by these states necessitates a delicate balance between meeting immediate obligations and ensuring long-term fiscal sustainability. Implementing prudent fiscal policies, reducing reliance on deficit financing, and prioritizing developmental expenditures are crucial steps in fostering economic resilience across India’s states.

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