RBI Says States' High Debt-To-GDP Ratio Worrisome

States' debt-to-GDP ratio is expected to remain at 31 per cent by the end of the current fiscal, which is higher than the 20 per cent target which is to be achieved by the next fiscal, i.e. 2022-23.

This was reported by the Reserve Bank of India (RBI) in its annual publication on states' budgets of 2021-22.

The combined debt-to-GDP ratio staying higher than the 20 per cent target earmarked for the next fiscal, is a worrisome trend, the report noted.

The central bank noted in the report that as the impact of the second wave of the Coronavirus pandemic subsides, state governments need to take credible steps to address debt sustainability concerns.

“The combined debt to GDP ratio of states which stood at 31 per cent at end-March 2021 and is expected to remain at that level by end-March 2022, is worryingly higher than the target of 20 per cent to be achieved by 2022-23, as per the recommendations of the FRBM review committee,” it said.

In view of the pandemic induced slowdown, in its projections, the 15th Finance Commission expects the debt-GDP ratio to peak at 33.3 per cent in 2022-23 (in view of the higher deficits in 2020-21, 2021-22 and 2022-23), and gradually decline thereafter to reach 32.5 per cent by 2025-26.

The RBI further observed that the budgeted consolidated gross fiscal deficit (GFD) of 3.7 per cent of GDP for states for the year 2021-22 was lower than the 4 per cent level recommended by the 15th Finance Commission. This, it said, reflected the state governments' intent towards fiscal consolidation.

According to the report, in the medium term, improvements in the fiscal position of state governments will be contingent upon reforms in the power sector as recommended by Finance Commission and specified by the Centre like creating transparent and hassle-free provision of power subsidy to farmers, preventing leakage and improving fiscal health of power distribution companies.