States must take responsibility for their debt burden

States must take responsibility for their debt burden

The 2016-17 edition of the RBI’s study on state budgets has rightly warned states to claw back to the path of fiscal consolidation and lower their debt burden. The consolidated gross fiscal deficit to the state GDP (GFD – GSDP) ratio in 2015-16 (RE) breached the 3 per cent ceiling of fiscal prudence for the first time since 2004-05, showing the worsening of state finances.
Data comes with a lag but a slippage is also expected in 2016-17. At a combined fiscal deficit of about 7 per cent, Centre and states put together, India’s fiscal deficit is large. The consequences of fiscal imprudence — inflation, widening of the current account deficit and erosion of investor faith — will be adverse for the country. Large government borrowings also crowd out private investment.
The Centre is going all out to maintain fiscal discipline, but the onus equally lies with states. They must put their finances in a better shape for credible macroeconomic management. This will help in India’s ability to improve its credit rating.
The outstanding liabilities-to-GDP ratio for states stood at 23.9 per cent at the end of March 2017. The interest burden has grown for states participating in the financial restructuring of state electricity entities through the Ujwal Discom Assurance Yojana (UDAY).
Eight states borrowed over a staggering Rs 90,000 crore under UDAY in 2015-16. So, reform to bring in greater transparency in power utility finances brooks no delay. Guarantees committed by states are also seen as source of potential risk to debt sustainability. States should strive for revenue surpluses.
The 14th Finance Commission raised taxes devolved from the Centre to the states from 32 per cent of the divisible pool to 42 per cent. However, simultaneously, there was a cutback on central support for state plans. This means that states need more own fiscal space for development expenditure.
They must collect more taxes. The GST would be a big positive. Besides GST, levying reasonable user charges, boosting the performance of state public sector units and improving realisations from discoms will help anchor fiscal consolidation.