The RBI found Punjab and Haryana among the 10 most indebted states, the others being Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh and Uttar Pradesh . Contingent liabilities exceeded 5% of GSDP in Punjab, Rajasthan, Uttar Pradesh and Andhra Pradesh. These 10 worst states account for about half of all state government spending. Their other vulnerability indicators are GFD/GSDP (Gross Fiscal Deficit to Government Gross Domestic Product) ratios equal to or greater than 3% in FY 2021-22, in addition to deficits in their revenue accounts (except Uttar Pradesh and Jharkhand).
The interest payment-to-revenue ratio, a measure of the burden of debt service on state revenue, was above 10% in eight of these states, except Bihar and Jharkhand. Punjab, Madhya Pradesh and Kerala’s own tax revenue has declined, while its non-tax revenue has remained volatile, dropping significantly in recent years. This decline has disrupted government spending planning and increased their dependence on market borrowing. Their share of development expenditures is lower than that of other states, as their incurred expenditures (salaries, pensions, interest payments, administrative expenditures) account for more than 35% of total revenue expenditures.
Subsidies and gratuities
States such as Punjab, Gujarat and Chhattisgarh spend more than 10% of their expenditure on subsidies, the RBI report says, adding that subsidies are notorious for crowding out resources for other useful purposes. Punjab is expected to spend 45.4% of its own tax revenue collection and 17.8% of total revenue on gifts in the financial year 2022-23.
Punjab and Rajasthan appear to be most vulnerable to fiscal shocks arising from the realization of contingent liabilities, while financial risks from freebies appear to be highest in the case of Punjab, which spends heavily on free public services. Free provision of electricity, water, public transport, in addition to exemption from utility bills and agricultural loans, undermines credit culture, distorts prices through cross-subsidies, erodes incentives to private investment and discourages work at the current wage rate, leading to lower labor force participation. “Free electricity and water supply accelerates environmental degradation and groundwater depletion,” the report says.
Sri Lanka’s economic crisis reminds us that public debt is essential for sustainability and that Indian state fiscal conditions are showing signs of growing strain, the report warns. He suggests that states should restrain their revenue spending by reducing spending on short-term non-meritorious goods. In the medium term, they must stabilize debt levels. Large-scale reforms in the electricity distribution sector will help discoms reduce their losses in terms of financial viability and operational efficiency. In the long term, increasing the share of capital expenditures in total expenditures will help build long-term assets, generate revenue, and increase operational efficiency.