The mixed reaction to RBI’s article is indicating stress in many states due to high debt.
Highlight
- Expressing concern over creating financial stress in many states, RBI wrote a write-up
- It has called for corrective action among the 5 most indebted people, which has received a mixed response.
- The RBI article was prepared by a team of economists under the guidance of Deputy Governor Michael Debabrata Patra
The Reserve Bank of India (RBI) has expressed concern over creating financial stress in several states and taking corrective measures in the five most indebted people, with some misrepresenting the assessment and others pointing to an increase in income. Expenditure cut demand
Referring to the economic crisis in Sri Lanka, an RBI article prepared by a team of economists under the guidance of Deputy Governor Michael Debabrata Patra said on Thursday (June 16) that the five most indebted states- Punjab, Rajasthan, Bihar , Kerala and West Bengal- There is a need to take corrective measures by cutting down on expenditure on non-qualified items.
It had said that the state’s finances are vulnerable to a number of unforeseen shocks, which may alter their financial results, leading to slippages relative to their budgets and expectations.
It said, “The recent economic crisis in neighboring Sri Lanka is a reminder of the critical importance of public debt stability. The fiscal situation between states in India is showing warning signs of building tensions.”
For some states, it has been said that the shocks could increase their debt by a significant amount, creating fiscal stability challenges.
For the five most indebted states of Bihar, Kerala, Punjab, Rajasthan and West Bengal, the debt stock is no longer sustainable, as credit growth has outpaced their Gross State Domestic Product (GSDP) growth over the past five years, It warned.
Former Kerala finance minister and state secretariat member of the ruling CPI(M) TM Thomas Isaac said the state cannot cut its expenditure and added that the RBI has taken a short-sighted view on states showing warning signs of stress.
According to him, the revenue expenditure of Kerala can be reduced only marginally by cutting expenditure on various activities of the government, which is nowhere near the total expenditure of the state.
What did the advisor to Rajasthan CM Gehlot say in this regard?
Sanyam Lodha, advisor to the Chief Minister of Rajasthan said that the debt of all the states has increased and comparative figures are available. Even the debt of the Center has increased significantly. The GST compensation to the state is not being paid by the Centre.
He said, “The Center has not given any incentive for the loss to the states due to demonetisation, GST or even in the Corona era.
The Center introduced cess and additional excise duty on petrol and diesel and the states did not get their share which has resulted in loss to the state.
“The Union of India is badly weakening the states,” he said.
Rajasthan’s finance secretary Akhil Arora said, “The revenue of the state is increasing. We can show you the growth curve regarding the revenue and expenditure of the state in the last two years.”
Asked about the increase in subsidy burden, Arora said, “I don’t know which RBI report you are referring to and its duration. We can show you the data that we have, which is in the public domain.” And it is also audited.”
Speaking to news agency PTI, Isaac said that providing a stimulus package to Kerala to invest in capital expenditure is the only way to overcome the crisis.
“The Center should give a stimulus package to the state for capital expenditure, so that the income goes up,” he said.
West Bengal has estimated outstanding loans at Rs 5,86,438 crore as of March 2023, slightly higher than the estimated Rs 5,28,833 crore at the end of March 2022.
Economists said the increase in the state’s debt was mainly due to social welfare measures to support the livelihood of the people, who were badly hit by the pandemic. They say that this is putting pressure on the government’s finances.
Example of former ISI professor Abhirup Sarkar:
Renowned economist and former ISI professor Abhirup Sarkar said, “West Bengal’s debt/SGDP was falling since 2011-12, which was at 45 per cent, which has come down to 35 per cent according to a research paper prepared by RBI. However, West Bengal remained among the top five indebted states along with Kerala and Rajasthan.
In its estimate for 2022, the RBI said that West Bengal’s SGDP ratio has been pegged at 38.8 per cent.
BJP’s Rajasthan State President Satish Poonia said that it is true that per capita debt is increasing continuously in Rajasthan.
He said that this is happening due to economic indiscipline and poor financial management of the state government.
He said, “The total debt on the state is more than Rs 4 lakh crore. The government is not able to manage its finances properly and has no source of revenue generation. Even the government misappropriates money from centrally sponsored schemes.” is using.”
The RBI’s article said a slowdown in its own tax revenues, a large chunk of committed expenditure and a rising burden of subsidies have already strained the state government’s finances from COVID-19.
“New sources of risk have emerged in the form of rising expenditure on non-merit freebies, expansion of contingent liabilities and increasing overdues of discoms,” it said.
According to the article, the reintroduction of the old pension scheme by some states has exposed new sources of risk; Rising spending on non-merit freebies; Expansion of contingent liabilities, guarantee of strategic corrective measures.
“The stress test suggests that the financial conditions of the most indebted state governments are expected to worsen, with their debt-GSDP ratio likely to remain above 35 per cent in 2026-27,” the authors said.
However, the central bank said that 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 state governments should restrict their revenue expenditure by cutting spending on non-qualified items in the near term.
It said that in the medium term, the states need to make efforts towards stabilizing the level of debt.
It also recommended massive reforms in the power distribution sector, which would enable discoms (power distribution companies) to reduce losses and make them financially sustainable and operationally efficient.
In the long run, increasing the share of capital outlays in total expenditure will help create long-term assets, generate revenue and boost operational efficiency.
Also, state governments need to conduct fiscal risk analysis and regularly stress test their debt profiles to be able to implement provisioning and other specific risk mitigation strategies to manage financial risks efficiently.
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