The Reserve Bank of India (RBI) released a report titled “State Finances: A Study of Budgets for 2022-2023” on January 16, 2023, under the theme “Capital Formation in India: The Role of States.”
- The report is an annual publication that presents information, analysis, and an assessment of state government finances for 2022–2023 (FY23) in comparison to actual and revised/provisional accounts for 2020–2021 and 2021–2022, respectively. Click here to know more.
The three key observations from the RBI report are as follows:
Debt-to-GDP
i.The report states that the state’s debt to gross domestic product (GDP) ratio continues to be extraordinarily high.
- The debt-to-GDP ratio has decreased from 31.1% in 2020-21 to 29.5% in 2022-23.
- A high debt-deficit burden suggests that states may have to pay more to fulfil their obligations.
ii.A 20% debt-to-GDP ratio for states was suggested by the Fiscal Responsibility and Budget Management (FRBM) review committee, which was led by N K Singh.
iii.According to the report, state interest payments increased to 2% of GDP in 2020–21 from 1.7% in 2017–18, with states anticipating a drop to 1.8% in 2022–23.
iv.The states with the highest interest payments to revenue receipts ratios are Punjab, Tamil Nadu, Haryana, and West Bengal.
- This suggests that a significant amount of the states’ revenues in these states go toward interest payments, leaving them with less money to spend on other high-priority areas like health or education.
Contingent Liabilities
i.The report claims that the contingent liabilities of state governments have also significantly increased.
- The obligations of a state government to repay the principal and interest payments if a state-owned entity fails on a loan are referred to as contingent liabilities.
ii.The amount of guarantees issued by state governments increased from Rs. 3.12 lakh crore (2% of GDP) in 2017 to Rs. 7.4 lakh crore (3.7% of GDP).
- Andhra Pradesh, Telangana, and Uttar Pradesh have the most outstanding guarantees at the end of March 2021.
iii.The state’s finances are adversely affected by the state-owned power distribution companies (discoms).
iv.An RBI study estimated that a discom bailout would cost 2.3% of GDP for the 18 major states.
Old Pension Scheme (OPS)
i.The report also warns of new concerns, with some states preferring to return to the Old Pension Scheme (OPS).
- In the early 2000s, a new pension framework to lessen the financial burden on the state was implemented as it became apparent that financing the OPS would be challenging.
ii.Despite the fact that the majority of states agreed to the new pension scheme at the time, states such as Rajasthan and Chhattisgarh have now decided to withdraw, putting state budgets at risk.
iii.A substantial portion of state tax revenues are already allocated to pensions; in 2020–21, Rs. 3.86 lakh crore was allocated to pensions.
- Switching to the OPS will further increase pension liabilities, leaving less scope for more constructive spending.
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According to the Reserve Bank of India (RBI)’s 26th issue of the Financial Stability Report (FSR) on December 29 2022 ,India’s Current Account Deficit (CAD) widened to 4.4 per cent of GDP in Q2:2022-23 from 2.2% of GDP in the previous Q2:2022-23 and 1.2% in 2021-22.
About the Reserve Bank of India (RBI):
Governor – Shaktikanta Das
Deputy Governors – Mahesh Kumar Jain, Michael Debabrata Patra, M. Rajeshwar Rao, T. Rabi Sankar
Headquarters – Mumbai, Maharashtra
Establishment – 1935
