The RBI in its recently published paper has reported the growth trend in the outstanding loans of the states. The paper records an increase in the debt-GSDP ratio between 2013 and 2022.
What does the recent Reserve Bank of India (RBI) report have to say about the situation?
(1) Increase in outstanding debt of states: Possible reasons for this are the implementation of Ujjwal Discom Assurance Yojana (UDAY), farm loan waiver, continued increase in populist welfare measures, and growth slowdown, especially in 2019-20.
(2) Increased debt-GSDP ratio: A combination of increased expenditure and out-of-proportion revenue mobilization efforts has resulted in an increase in the debt-GSDP ratio (Gross State Domestic Product) between 2013 and 2022. The debt-GSDP ratio of the states increased from 22.6 in 2013 to 25.1 in 2018 and 31.2 in 2022.
(3) Debt-to-GDSP ratio is the ratio between a state’s debt and its GDP. It is a reliable indicator of how well a state is able to pay its debts.
(4) Decline in revenue receipts: There has also been a decline in revenue receipts due to the decline in the state’s own tax revenue.
‘Badly directed freebies’ can adversely affect the country’s economy
(1) Most of the time free gifts are poorly directed and “political compulsions” result in a financial mistake with significant adverse consequences.
(2) Free facilities provided by the state governments can wreak havoc on the state’s finances. We have seen in the case of Sri Lanka that fiscal negligence always leads to disaster.
(3) This can only aggravate the already deteriorating public debt situation in many states and create inter-generational friction along with distorted incentives.
two types of public expenditure
(1) Compulsory Expenses: Expenses governed by prescribed formulas or norms rather than by appropriations from time to time, unless expressly changed.
(2) Discretionary spending: Expenditure governed by annual or other periodic appropriations. Such “spending is used to stimulate the economy” during periods of low demand and dwindling jobs due to the high multiplier effect of government spending.
Issues related to discretionary spending by the state
(1) No Assured Output: Evidence from other countries shows that there is no direct relationship between growth output and discretionary spending.
(2)Financial stress: Once started, it is difficult to reduce government spending later, as it requires dealing with public resistance.
(3) Spillover Effect: In a federal system, the fiscal stress of the states spills over to the Centre, leading to overall fiscal slippage.
(4) Mobilizing volatile resources: To finance discretionary spending, state governments may resort to borrowing, which may eventually require mobilizing additional resources which are not sustainable.
