Statsguru: States' finances are improving, debt likely to shoot up

When the Union government announced Budget for 2022-23, it had projected revenue to be 8.5% of GDP. A Business Standard analysis of latest report on state finances showed that states are catching up

When the Union government had announced the Budget for 2022-23, it had projected revenue to be 8.5 per cent of gross domestic product (GDP). A Business Standard analysis of the latest report on state finances released by the Reserve Bank of India last week showed that states were catching up. The revenue-to-GDP ratio projected by states was 8.2 — the highest in the past six years (chart 1). While states’ own revenue as a proportion of GDP is expected to rise, it is still low as a proportion of total revenue (the other part comes from central transfers). In 2022-23, the proportion of states’ own revenue compared to total revenue is expected to be 54.7 per cent, compared with 55.6 per cent in 2019-20 (chart 2). The silver lining is the improvement in states’ own revenue generation capacity. However, it is still not comparable to 2017-18, when the tax revenue ratio was 48.7 per cent. India introduced the goods and services tax in July 2017. Central transfers have declined in the last three years but will still end up being higher than the 2019-20 ratio of 44.4 (chart 3).

Meanwhile, revenue expenditure stays elevated. Revenue expenses account for 80 per cent of total spending. In terms of GDP, revenue expenditure will be almost double of states’ own receipts at 15.3 per cent (chart 4). The problem is rising committed expenditure. Although the share of interest payments and liabilities has declined, these still account for a fifth of total expenditure by states (chart 5). States’ pension liabilities are expected to shoot up if they return to the old pension scheme. “A major risk looming large on the subnational fiscal horizon is the likely reversion to the old pension scheme by some states,” the central bank highlighted in the state finances study. Debt is also expected to shoot up. While state debt was under 26 per cent of GDP between 2016-17 and 2018-19, it has been consistently higher since. In 2022-23, state debt is expected to be 29.5 per cent of GDP.