5 states need to take steps to stabilise debt levels:RBI

BIHAR, KERALA, Punjab, Rajasthan and West Bengal are the five highly stressed states after taking into account the warning signs flashing from all the indicators, a Reserve Bank of India (RBI) study has said.

RBI study on state finance

• We 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 Punjab is expected to remain in the worst position as its debt-GSDP ratio is projected to exceed 45 per cent in 2026-27, with further deterioration in its fiscal position.
• Rajasthan, Kerala and West Bengal are projected to exceed the debt-GSDP ratio of 35 per cent by 2026-27.
• These states will need to undertake significant corrective steps to stabilise their debt levels.
• 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.
• These 10 states account for around half of the total expenditure by all state governments in India.

Declining Revenue

• It said the own tax revenue of some of these 10 states, viz.. Madhya Pradesh, Punjab and Kerala, have 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 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 in revenue accounts.
• It said Punjab is expected to remain in the worst position as its debt-GSDP ratio is projected to exceed 45 per cent in 2026-27, with further deterioration in its fiscal position.

Prelims Takeaway

• Fiscal deficit
• Center state fiscal federalism
• Debt-GSDP ratio