Referring to the economic crisis in Sri Lanka, a Reserve Bank article on Thursday said states are showing warning signs of mounting stress, and that the 5 most indebted countries – Punjab, Rajasthan, Bihar, Kerala and West Bengal – are taking corrective action. have to cut through spending on non-meritorious goods.
State finances are vulnerable to a variety of unexpected shocks that could alter their fiscal results, causing slippages against their budgets and expectations, according to the RBI article prepared by a team of economist led by Vice Governor Michael Debabrata Patra.
“The recent economic crisis in neighboring Sri Lanka reminds us of the crucial importance of public debt sustainability. Interstate fiscal conditions in India are showing warning signs of increasing stress,” the report said.
For some states, it added, shocks can increase their debt by a significant amount, posing fiscal sustainability challenges.
Given that the slowdown in own tax revenues, a high share of committed spending and rising subsidy costs have stretched public finances, which have already been exacerbated by COVID-19, the article said.
“New sources of risk have emerged in the form of rising spending on unearned freebies, growing contingent liabilities and the delinquent discoms,” it said.
For the five most indebted states, Bihar, Kerala, Punjab, Rajasthan and West Bengal, the debt burden is no longer sustainable as debt growth has outpaced their gross domestic product (GSDP) growth over the past five years, it warned. .
According to the article, new sources of risk have emerged from the relaunch of the old retirement plan by some states; rising spending on unearned freebies; extension of contingent liabilities; and the ballooning overdue of — justifying strategic corrective action.
“Stress tests show that the fiscal conditions of the most indebted governments are expected to deteriorate further, with their debt-GSDP ratio likely to remain above 35 percent in 2026-27,” the authors said.
However, the central bank said the views expressed are those of the authors and do not necessarily reflect the views of the Reserve Bank of India.
As a corrective measure, the article suggested that state governments should limit their revenue expenditures by reducing spending on unearned goods in the short term.
In the medium term, it added that efforts should be made by states to stabilize debt levels.
It also recommended that large-scale reforms in the power distribution sector would enable discoms (power distribution companies) to reduce losses and make them financially sustainable and operationally efficient.
In the long run, increasing the share of capital expenditures in total expenditures will help create long-term assets, generate revenue and increase operational efficiency.
In addition, states must conduct tax risk analyzes and regularly stress test their debt profiles in order to be able to implement provisions and other specific risk mitigation strategies to efficiently manage tax risks.
