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Context

The Comptroller and Auditor General of India (CAG) has released its first-ever decadal analysis of the fiscal health of Indian states.

Key Findings of the CAG Report (2013-14 to 2022-23)

Why is State Debt Increasing?

Structural Fiscal Imbalance

States are responsible for nearly two-thirds of the country's public expenditure (on sectors like health, education, law and order), but they collect less than one-third of the total government revenues. This inherent mismatch forces them to borrow.

Impact of GST

The Goods and Services Tax (GST) system, introduced in 2017, centralized indirect tax collection. While it streamlined the tax system, it limited the fiscal autonomy of states to raise their own revenues independently.

The increasing use of central cesses and surcharges, which are not part of the divisible pool of taxes shared with states, further squeezes state finances.

High Reliance on Market Borrowings

States have increasingly turned to borrowing from the open market. These loans come with higher interest rates compared to other sources like central government loans, increasing the debt servicing cost.

Contingent Liabilities

State governments provide guarantees for loans taken by their public sector enterprises (e.g., for power distribution companies or infrastructure projects). These "off-budget" borrowings, known as contingent liabilities, create future financial obligations that are not always reflected in the official debt figures.

Implications of Rising State Debt

Threat to Fiscal Federalism

High debt levels increase states' dependence on the central government for funds and bailouts, weakening their fiscal autonomy and undermining federal structure.

Risk of a Debt Trap

A significant portion of state revenue is now used to pay interest on past loans. This leads to a vicious cycle where states must borrow more just to repay existing loans and interest, a situation known as a debt trap.

Reduced Developmental Spending

With more money going towards debt servicing, states have fewer resources for critical sectors like infrastructure, health, and education, which slow down long-term economic growth.

Widening Regional Disparities

States already struggling with high debt find it harder to invest in development, which worsen economic inequalities between fiscally healthy and fiscally stressed states.

Impact on Social Welfare

To control deficits, states may be forced to cut back on essential social welfare programs, which negatively affect the most vulnerable sections of the population.

Way Forward: A Roadmap to Fiscal Prudence

Enhance Revenue Generation

Improve tax collection efficiency by using technology to plug leakages and expand the tax base.

Explore innovative non-tax revenue sources like monetizing public assets, improving mining royalties, and promoting tourism.

Rationalize Expenditure

Prioritize productive capital expenditure that creates long-term assets over populist revenue expenditure.

Review and rationalize inefficient subsidy programs to ensure they are well-targeted and do not strain state finances.

Prudent Debt Management:

Adhere strictly to the debt-to-GSDP limits set by the Fiscal Responsibility and Budget Management (FRBM) Act.

Explore options to refinance high-interest debt with lower-cost loans from sources like the National Small Savings Fund (NSSF) or specialized bonds (e.g., Green Bonds).

Strengthen Centre-State Fiscal Cooperation

The Finance Commission should recommend an adequate share of central taxes for states to address the vertical fiscal imbalance.

Ensure timely and predictable transfer of funds, including GST compensation dues, from the Centre to the states.

Improve Public Financial Management

Adopt performance-based budgeting, where expenditure is linked to specific outcomes.

Use technology for transparent procurement and efficient project management to reduce costs and delays.

Conclusion

The CAG's report is a critical wake-up call. While borrowing is a necessary tool for development, unsustainable levels of debt can cripple a state's economy and compromise its future. A balanced approach focusing on fiscal discipline, revenue enhancement, and strategic expenditure is essential.  

Source: INDIANEXPRESS.