States' expected high levels of debt 31-32% of GDP in the upcoming fiscal year: Know the reasons

According to a report, states' debt is expected to remain high this fiscal year, accounting for 31-32% of GDP due to increased capital expenditures and moderate revenue growth. Total borrowings are also expected to increase by 9% to exceed Rs. 87 lakh crore.

A state's debt to gross state domestic product (GSDP) ratio indicates how indebted it is. The debt-to-GSDP ratio was at 28–29 prior to Covid. According to a Crisil Ratings report, however, the overall gross fiscal deficit (GFD) as a ratio of GSDP is anticipated to stay at 2.5, significantly below the level of 3 required by the Fiscal Responsibility and Budget Management Act.

In addition to meeting high committed revenue expenditures related to salaries, pensions, and interest costs, states are forced to borrow more money in order to expand capital outlays as a result of lower-than-expected revenue growth. This will maintain the high debt level at 31–32% of their GDP, along with modest single-digit revenue growth.

18 states accounts for 90% of the GSDP

The data used in the report comes from the top 18 states, which together account for 90% of the total GSDP:

• Maharashtra
• Gujarat
• Karnataka
• Tamil Nadu
• Uttar Pradesh
• Telangana
• Rajasthan
• Bengal
• Madhya Pradesh
• Andhra Pradesh
• Kerala
• Odisha
• Punjab
• Bihar
• Chhattisgarh
• Haryana
• Jharkhand
• Goa

Why states experiencing Fiscal Deficit?

Following a slight revenue surplus in the 2022 fiscal year, the states experienced a deficit in the 2023 fiscal year due to a modest 8% growth in overall revenue and a faster 11% year-over-year increase in revenue expenditure.

This fiscal year, devolutions from the Center, taxes and duties on alcohol, and collections from the goods and services tax are expected to support an overall revenue increase of only 6-8%.

However, revenue expenditures are expected to rise by 8–10% due to increased committed spending as well as rising costs associated with public health and social welfare, which together account for about 65% of state revenue expenditures.

Fiscal Deficit is expected to rise to 0.5% this year

Senior director at the agency Anuj Sethi predicts that the revenue deficit will gradually increase from 0.3% of GSDP in the previous fiscal year to 0.5% this fiscal year.

In addition to the 18–20% annual increase in capital outlays, or 2.3% of GSDP, on key infrastructure sectors like roads, irrigation, urban development, and water supply and sanitation, this will necessitate additional borrowings for the current fiscal year.

States will receive Rs.1.3 lakh crore from the central government

Nonetheless, the states will receive Rs.1.3 lakh crore in interest-free, 50-year loans from the central government to help partially cover the capital expenditure and stimulate investment. This loan is not covered by the state's 3% GSDP borrowing cap for this fiscal year.

A director at the agency named Aditya Jhaver predicts that the states' overall balance sheet borrowings as well as off-budget debt funding such as guarantees to the power sector and irrigation entities will likely increase by Rs.7.5 lakh crore this fiscal year and surpass Rs.87 lakh crore, maintaining the high level of state debt at 31-32%, much like in fiscal 2023.

Already, between April and November 2023, borrowings through state development loans—which make up 65% of total borrowings—rose by 28% year over year.

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