The rising burden of contingent liabilities is primarily from the financial restructuring plan (FRP) of power distribution companies and PSU bailouts. In addition, increased market borrowings since 2008-09 could also add to states repayment obligations beginning 2017-18.
The Reserve Bank of India report on state finances released last week highlighted the states largely revenue-driven fiscal consolidation drive which, coupled with debt/interest relief by the Centre, has helped boost states revenue flows and reduce their overall debt-GDP ratio to levels even better than recommended by the 13th Finance Commission.
As per RBI data, states aggregate outstanding guarantees, a major source of their contingent liabilities, have come down steadily from 8% of GDP in 2000-01 to 6.3% in 2004-05 and further to 2.5% in 2011-12. Some big states such as Maharashtra and Gujarat have sharply reduced their outstanding guarantees over the decade. But outstanding guarantees as a proportion of state GDP are dangerously high and have surged in recent years for some states such as Punjab and Rajasthan.
Punjabs outstanding guarantees were estimated at an alarming 22.81% of the gross state domestic product (GSDP) in 2012-13, while in the case of Rajasthan, the figure was 14.57% in 2011-12. Tamil Nadu and Uttar Pradesh are among other states whose outstanding guarantees are at very high levels. In the case of Punjab, the state outstanding guarantees rose from R6,070 crore in 2000-01 to R67,030 crore in 2012-13 and is budgeted to rise to R78,570 crore for 2013-14. Worse, Punjab opted out of the Centre-assisted FRP due to its reluctance to carry out the mandatory tariff reforms, which means compensating distribution companies losses from the state budget. Rajasthan has signed up for FRP.
The rise in state guarantees is worrisome as most state electricity boards (SEBs) and PSUs are incurring heavy losses. There is no certainty that the FRP which envisages restructuring of state power utilities short-term losses and liabilities, which amounted to Rs 1.9 lakh crore as at March-end 2012 will salvage these utilities. The FRP makes timely tariff revisions mandatory but a revamp of the power sector involves larger policy questions including full pass-through of (rising) fuel prices, which need to be addressed in the political arena.
It requires state governments to take over 50% of discoms outstanding short-term liabilities as at end-March 2012 through issuance of special securities in favour of lenders in a phased manner over a time frame of two to five years and redeem these from 2018-19 onwards in annual instalments over the next 10 years. As these special securities are likely to be significantly larger in size than the power bonds that will be extinguished by fiscal year 2016-17, the overall repayment pressure of states that have opted for FRP could be much higher from 2018-19, analysts said.
While the revenue accounts of several state governments continue to record surpluses (an estimated aggregate 0.4% of GDP in 2012-13 as against 0.1% in 2011-12), despite the overall moderation in economic growth, this needs to be seen in the light of poor performance of state public sector enterprises including state-owned power distribution companies. States that have decided to participate in the scheme for financial restructuring of state discoms announced by the central government in October 2012 are required to provide guarantees to the bonds to be issued by discoms to participating lenders. This will add to the contingent liabilities of state governments, the RBI report said.
Some of the states have given guarantees to the cash-strapped SEBs and state PSUs to enable them to raise funds. The budgets of PSUs and SEBs are not consolidated with the respective state budgets. If some of these SEBs and PSUs default on repayment on their debt, it will devolve on the state government, said Devendra Pant, chief economist of Fitch Ratings Indian unit.
Thankfully, many states have put a ceiling on the guarantee as part of their fiscal consolidation process and some even set up guarantee redemption funds to shield their balance sheets from any exigencies arising out of defaulting PSUs. Punjab, Rajasthan, Tamil Nadu and Uttar Pradesh, however, are yet to set up such funds.
The states fiscal consolidation got an added push since 2010-11. Their overall debt-GDP ratio is projected to be 21.4% in 2013-14 against Finance Commission-stipulated 24.9%.