Many states including Punjab and Rajasthan are facing the prospect of a big jump in their contingent liabilities in the years to come, indicating that the secular decline in states’ outstanding liabilities seen since 2004-05 might not last for too long.
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.
Punjab’s 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