RBI Report on State Government Budgets
Present circumstances:
- India’s public conversation typically revolves around the Union government’s budget. State capital spending is higher than federal capital spending, with state governments accounting for the majority of general government spending (both at the federal and state levels).
- Therefore, state budgets are absolutely crucial. especially so when economic investment activity in the public sector is a primary driver of economic growth.
- A report on the state budgets for 2022–2023 was just just released by the Reserve Bank of India.
- The report explains how state government finances, which were severely strained in 2020–21 due to the economy’s slump brought on by the epidemic, have improved since then. But there are several reasons to be concerned.
The areas of concern mentioned in the report are:
Ratio of debt to GDP:
- The ratio of the state’s debt to its GDP is still too high. The study found that the debt-to-GDP ratio fell from 31.1% in 2020–21, a year in which states struggled to manage the economic repercussions of the pandemic, to 29.5% in 2022–23.
- It exceeds the 20% debt-to-GDP ratio recommended for states by the Fiscal Responsibility and Budget Management review group, which was chaired by N K Singh.
- States’ limited room for manoeuvring in the event of the next economic shock is a result of their massive debt-deficit loads.
- States with a high debt load can also be required to make additional payments to repay their debt.
- State interest payments climbed from 1.7% of GDP in 2017–18 to 2% of GDP in 2020–21, according to the study. States predict that in 2022–2023, this will fall to 1.8%.
- But there is a definite distinction between the states. Punjab, Tamil Nadu, Haryana, and West Bengal have the highest ratios of interest payments to income received.
- This means that a sizable portion of the states’ revenue in these states is used to cover interest payments, leaving them with less money for other crucial expenditures like health or education.
Upcoming commitments:
- State governments now have much higher contingent obligations.
- The state government’s pledges to repay principal and interest in the event that a state-owned company doesn’t make loan payments are known as contingent liabilities.
- State government guarantees climbed from Rs. 3.12 lakh crore or 2% of GDP in 2017 to Rs. 7.4 lakh crore or 3.7% of GDP, according to the data.
- According to the de-identified statistics, the states of Andhra Pradesh, Telangana, and Uttar Pradesh had the most outstanding guarantees as of the end of March 2021.
- State-owned power distribution companies, or discoms, are in a dangerous situation, which has a bad impact on position finances.
- The financial and operational position of state discoms has been improved by a number of efforts during the past few decades.
- They continue to lose money despite their performance being significantly below expectations across a number of indices.
- With each occasion, the sums involved have grown. A fresh bailout plan will place a significant financial strain on the states. According to an RBI research, bailing out the 18 largest states would cost 2.3% of GDP.
The old pension scheme:
- New issues have arisen as a result of certain governments’ decision to reinstate the previous pension system.
- In the early 2000s, it became increasingly clear how impossible it would be to maintain the existing pension arrangement.
- According to the RBI, the annual budgetary resource savings that emerge from this decision are only transitory. If states put off paying current spending, their future unfunded pension liabilities could increase.
- The implementation of a new pension plan would lessen the financial strain placed on the state. At the time, most states approved of the new pension plan, but some, notably Rajasthan and Chhattisgarh, have since opted against it.
Conclusion:
- The burden of debt as a percentage of GDP must be reduced for state governments in order to reduce interest payments on the budget deficit and enhance programme implementation.
For DISCOM reform, more measures like the ones listed below need to be taken:
- For the PFC/REC (Power Finance Corporation/Rural Electrification Corporation), establish a regulatory framework.
- Financial regulatory overhaul.
- It is necessary to combat the culture of freeloaders.
- Improving transparency within DISCOM.
- Stronger political will is necessary in addition to the aforementioned technical and economic improvements in order to restructure the electricity industry and DISCOM.