Rising Public Debt of States – A Decadal Analysis by CAG

Rising Public Debt of States Latest News

• The Comptroller and Auditor General of India (CAG) released a first-of-its-kind decadal report (2013-14 to 2022-23) on the fiscal health of states, highlighting a sharp increase in public debt and its implications for fiscal sustainability.

Meaning of Public Debt

• Public debt arises when government expenditures exceed its revenue from taxes and other sources, necessitating borrowing from domestic and international markets.
• In essence, public debt includes all liabilities of the government funded through the Consolidated Fund of India or the Consolidated Fund of State (in case of a state government). 
• This debt is categorized into internal and external components, with  internal debt further subdivided into marketable and non-marketable securities.
• Marketable government securities, such as G-secs and T-Bills, are issued through auctions, while non-marketable ones include treasury bills issued to state governments and special securities for the National Small Savings Fund.

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Debt-to-GDP/GSDP Ratio

• Meaning:

• • A Debt-to-Gross Domestic Product (GDP) ratio/ a Debt-to-Gross State Domestic Product (GSDP) ratio is a critical metric assessing a country’s/ a state’s ability to service its debt – indicating its ability to repay debt. 
  • A higher ratio signals greater fiscal risk, while a lower ratio suggests greater stability and capacity to handle debt. 
• Significance: It is important for prudent fiscal management, as is crucial to evaluate the nature of government deficits—whether they fund capital assets or non-asset-creating expenditures like subsidies. 
• Acceptable level of debt-to-GDP ratio: The NK Singh Committee (established in 2016 to review and recommend changes to the FRBM Act, 2003) proposed a debt-to-GDP ratio of –
  • 40% for the central government and 20% for states, 
  • Aiming for a combined general government debt-to-GDP ratio of 60%.

Growth in States’ Public Debt

• Total debt (internal debt and loans and advances from the Centre) increased: From ₹17.57 lakh crore in 2013-14 to ₹59.60 lakh crore in 2022-23 (rose by 3.39 times).
• Debt-to-GSDP ratio: Increased from 16.66% (2013-14) to 22.96% (2022-23).
• Contribution to National GDP: States’ debt equaled 22.17% of India’s GDP in FY 2022-23.

Inter-State Variations in Debt Burden

• Highest Debt-to-GSDP ratios: Punjab (40.35%), Nagaland (37.15%), West Bengal (33.70%).
• Lowest ratios: Odisha (8.45%), Maharashtra (14.64%), Gujarat (16.37%).
• Distribution:
  • As on 31st March 2023, 8 states had public debt liability of more than 30%  of their GSDP; 
  • 6 states had public debt liability of less than 20% of their GSDP and 
  • The remaining 14 states had public debt liability between 20 to 30% of their respective GSDP in FY 2022-23.

Sources of States’ Public Debt

• Loans raised from the open market through securities, treasury bills, bonds, etc.
• Loans from banks such as the State Bank of India (SBI).
• Ways and Means Advances (WMA) from Reserve Bank of India (RBI).
• Loans from financial institutions such as Life Insurance Corporation of India (LIC) and National Bank for Agriculture and Rural Development (NABARD).
• Loans from the union government. Example, back-to-back loans for GST compensation shortfall and special capital assistance (especially during COVID-19).

Debt Sustainability Indicators

• Debt as percentage of revenue receipts: Varied between 128% (2014-15) and 191% (2020-21).
• Debt as percentage of non-debt receipts: Between 127% and 190%.
• Average debt profile: 
  • On an average, the public debt of the states has been about 150% of their revenue receipts/ total non-debt receipts. 
  • Similarly, public debt has ranged between 17-25% of the GSDP and 20% of the GSDP. 
  • The marked increase of 4%, from 21% of GSDP in FY 2019-20 to 25% in FY 2020-21 is attributable to decrease in GSDP in FY 2020-21 being Covid year.

Fiscal Management Concerns

• Golden rule of borrowing: Debt should finance capital expenditure, not revenue expenditure.
• Violation of rule: 11 states (including Andhra Pradesh, Punjab, West Bengal, Kerala, etc.) used borrowings to finance current expenditure.
• Example: Andhra Pradesh spent only 17% and Punjab 26% of borrowings on capital expenditure.
• Risk: 
  • GST compensation loans and COVID relief borrowing have altered debt dynamics.
  • Unsustainable fiscal practices resulting in crowding out of productive investment and debt trap potential.
  • High state debt levels threaten macroeconomic stability and strain Centre-State fiscal relations.

Way Forward

• Fiscal discipline: States must align borrowing with productive capital creation, avoiding use for routine expenditure.
• Debt management strategy: Establishing Public Debt Management Agency (PDMA, proposed in the 2015 Union Budget) – enhanced transparency, improved monitoring, and debt restructuring mechanisms.
• Strengthening state finances: Diversify revenue sources, rationalise subsidies, improve tax buoyancy, and reduce dependence on central transfers.
• Adherence to FRBM Act: Ensure fiscal prudence through legally binding debt and deficit targets.
• Institutional mechanisms: Strengthening state finance commissions and CAG oversight for sustainable fiscal federalism.

Source: IE