State debt up dramatically

Bhubaneswar, Nov 22 | Updated: Nov 23 2005, 05:30am hrs
The outstanding debt of state governments increased dramatically in the last decade. From just 19% of GDP in 1992-93, the ratio increased to 28.1% in 2002-03, according to a paper prepared by Rajendra Vaidya of the Indira Gandhi Institute of Development Research, Mumbai, under the aegis of the Administrative Staff College of India, Hyderabad and the National Institute of Public Finance and Policy, New Delhi sponsored by the Asian Development Bank.

At current prices, the total debt of states has increased more than six times between 1991 and 2003. The composition has also changed dramatically over this period.

While internal debt (including market loans, loans from banks and financial institutions and special securities issued to the National Small Savings Fund) has increased dramatically from 17.2% in 1991 to 25.6% of total debt in 2003, the share of loans from the Centre has fallen significantly from 68.3% in 1991 to 37.8% in 2003.

Inevitably, it is the poorer states which have experienced the most severe fiscal deterioration. Following the divergence in growth rates in the post-reform period, these disparities have only widened as states ability to service their debts is critically tied up to the health of the states economy.

There are 11 states where the outstanding debt to revenue receipts ratio exceeds two, a truly alarming situation. The huge indebtedness has led to huge outgo by way of interest payment - in 2004, the ratio of interest payments to revenue receipts increased 30% in the case of West Bengal, Himachal Pradesh, Orissa, Uttar Pradesh, Rajasthan and Gujarat.

Meanwhile, contingent liabilities have also increased as state governments have extended guarantees for a whole host of borrowings by state-owned entities.

Mr Vaidya recommends a multi-pronged strategy to tackle the problem of growing indebtedness. This includes a re-examination of the entire federal fiscal transfer mechanism to increase both transparency and reduce uncertainty. u

Abolition of SLR status for state-government borrowing, replacing the present system of market borrowing with one that shows greater responsiveness to market signals and having a rule-based control on state government borrowing are among the other recommendations made by him.

He argues it is too early in the day to pass judgment on the impact of the fiscal responsibility legislation.