Debt Sustainability of States

Subject – Economy

Context – RBI report says combined debt-to-GDP ratio is worryingly high at 31 per cent

Concept –

The report “State Finance: Study of Budgets” noted that the combined debt-to-GDP ratio of States, which stood at 31 per cent at end-March 2021, is expected to remain at that level by end-March 2022 and is worryingly higher than the target of 20 per cent to be achieved by 2022-23, as per the recommendations of the Fiscal Responsibility and Budget Management (FRBM) Review Committee, chaired by NK Singh.
In view of the pandemic-induced slowdown, the 15th Finance Commission expects the debt-GDP ratio to peak at 33.3 per cent in 2022-23 (given the higher deficits since 2020-21), and gradually decline to reach 32.5 per cent by 2025-26.
States have preferred to borrow from the financial accommodation provided by the RBI through short-term borrowing via the special drawing facility (SDF) and ways and means advances (WMA).
Additionally, in recent years, the States have been accumulating sizeable cash surpluses in the intermediate treasury bills (ITBs) and auction treasury bills (ATBs), although they involve a negative carry of interest rates for the States.

FRBM Act

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, intends to bring transparency and accountability in the conduct of the fiscal and monetary actions of the government.
The central government agreed to the following fiscal indicators and targets, subsequent to the enactment of the FRBMA
Revenue deficit to be eliminated by the 31st of March 2009. A minimum annual reduction of 0.5% of GDP.
Fiscal Deficit to be brought down to at least 3% of GDP by 31st of March 2008. A minimum annual reduction – 0.3% of GDP.
The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:
- Medium Term Fiscal Policy Statement
- Macroeconomic Framework Statement
- Fiscal Policy Strategy Statement
The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding liabilities be projected as a percentage of gross domestic product (GDP) in the medium-term fiscal policy statement.
Several years have passed since the FRBM Act was enacted, but the Government of India has not been able to achieve targets set under it. The Act has been amended several times.
In 2013, the government introduced a change and introduced the concept of effective revenue deficit.
This implies that effective revenue deficit would be equal to revenue deficit minus grants to states for the creation of capital assets.
In 2016, a committee under N K Singh was set up to suggest changes to the Act.