Referring to the economic crisis in Sri Lanka, the Reserve Bank of India says some states in India are showing warning signs of building stress and need to take corrective measures by cutting down expenditure on non-merit goods.
State finances are vulnerable to a variety of unexpected shocks that might alter their fiscal outcomes, causing slippages relative to their budgets and expectations, said the RBI article prepared by a team of economist under the guidance of deputy governor Michael Debabrata Patra.
Highlighting the Sri Lankan crisis, the central bank paper attempted to put the spotlight on fiscal risks confronting state governments in India, with emphasis on the heavily indebted states. The slowdown in own tax revenue, a high share of committed expenditure and rising subsidy burdens have stretched state government finances already exacerbated by COVID-19.
“The recent economic crisis in neighbouring Sri Lanka is a reminder of the critical importance of public debt sustainability. The fiscal conditions among states in India are showing warning signs of building stress,” it said.
For the five most indebted states of Bihar, Kerala, Punjab, Rajasthan and West Bengal, the debt stock is no longer sustainable, as the debt growth has outpaced their Gross State Domestic Product (GSDP) growth in the last five years, it warned.
As per the article, new sources of risks have emerged from relaunch of the old pension scheme by some states; rising expenditure on non-merit freebies; expanding contingent liabilities; and the ballooning overdue of DISCOMS– warranting strategic corrective measures.
For some states, it added, shocks may increase their debt by a significant amount, posing fiscal sustainability challenges.
Observing that the slowdown in own tax revenue, a high share of committed expenditure and rising subsidy burdens have stretched state government finances already exacerbated by COVID-19, the article said.
“New sources of risks have emerged in the form of rising expenditure on non-merit freebies, expanding contingent liabilities, and the ballooning overdue of discoms,” it said.
“Stress tests show that the fiscal conditions of the most indebted state governments are expected to deteriorate further, with their debt-GSDP ratio likely to remain above 35 per cent in 2026-27,” the authors said.
The central bank, however, said the views expressed are those of the authors and do not necessarily reflect the views of the Reserve Bank of India.
As a corrective measure, the article suggested that the state governments must restrict their revenue expenses by cutting down expenditure on non-merit goods in the near term.
In the medium term, it added the states need to put efforts towards stabilising debt levels.
It also recommended large scale reforms in power distribution sector would enable the discoms (power distribution companies) to reduce losses and make them financially sustainable and operationally efficient. (Courtesy PTI)
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