RBI concern over rising states debts

RBI concern over rising states debts
ENS ECONOMIC BUREAU

MUMBAI, FEB 2: The Reserve Bank of India (RBI) has raised serious concern about the soaring liabilities of state governments. Indicating the worsening fiscal position of the state governments, the RBI's report on finances of state governments (1999-2000) has estimated outstanding liability of the states at Rs 409,258 crore by March 2000, a 19.9 per cent rise over Rs 341,259 crore by end-March 1999.

In terms of GDP, it is estimated to reach 20.5 per cent during 1999-2000 as compared with 19.4 per cent in 1998-99 which raises concern about the long-term sustainability of public debt of the state governments. The growing debt problem of the states generally reflects the high level at which the aggregate expenditure of the state governments has stayed (around 15 per cent of GDP), the sluggishness in own-tax revenues and relatively low return from investments.

The rising expenditure has been mainly concentrated in non-Plan revenue expenditure, largely on account of wages and salaries, pensions and interestpayments. During 1998-99, the state governments had to bear an additional fiscal burden on account of pay revision. ``Not only are these expenditures committed, they are also down sticky,'' says the report.

In the short-run, it would be difficult for the State Governments to control these expenditures. The states are, therefore, often constrained to choose the soft option of cutbacks in capital outlays. With the result, the actual Plan investment often fell short of the original outlays. This has affected allocation of adequate resources for education and health sectors, the development of which is primary responsibility of states.

On the revenue side, there has been steady deterioration in tax-gross fiscal deficit ratio on the one side and lack of buoyancy in non-tax revenue collections on the other. Both the developed and backward states are confronted with the situation of rigid revenue position. The report suggests that efforts are needed to exploit the full tax potential by timely collections ofarrears, curtailing unproductive incentives and strengthening of tax administration.

Apart from the states efforts at improving the resource level in the current year, the high proportion of the total borrowings requirements which would be used for financing the revenue gap continues to be a matter of concern. The revenue deficit reached 53.8 per cent of the GFD in 1998-99. This had led to less use of borrowings for investments purposes as is evinced by the fact that expenditure in capital outlay which absorbed 49.1% of GFD in 1990-91 and 60.4 per cent in 1993-94 is anticipated to dip to 36.8 per cent in 1999-2000.

In addition to the high stock of public liabilities, contigent liabilities or guarantees have bearing on the health of state finances.