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Hyderabad: In what appears to be a politically-motivated move to stall Telangana’s development, the union Finance Ministry has reduced the State’s open market borrowing limit by Rs 19,000 crore for this fiscal.

Telangana will be able to raise only Rs 34,970 crore in 2022-23 as against the Rs 53,970 crore Fiscal Responsibility and Budget Management (FRBM) loan it proposed in the Budget. This, given Telangana’s standing among other States in terms of financial health, doesn’t seem to be based on its fiscal strength.

The RBI, in its June Bulletin, flagged 10 States with fragile financial conditions, and Telangana does not figure in that list. In fact, it fared far better than most States. Based on the debt-GSDP ratio in 2020-21, Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana have the highest debt burden. These 10 States accounted for around half of the total expenditure by all State governments in the country.

Other vulnerability indicators such as gross fiscal deficit to gross domestic product (GFD-GDP) ratios in these States were equal to or more than 3 per cent in 2021-22, besides deficit in their revenue accounts. The interest payment to revenue receipts (IP-RR) ratio, a measure of debt servicing burden on States’ revenues, in eight of these States was more than 10 per cent. Bihar, Kerala, Punjab, Rajasthan, and West Bengal are highly stressed States.

Andhra Pradesh, Bihar, Rajasthan and Punjab exceeded both debt and fiscal deficit targets for 2020-21 set by the 15th Finance Commission. Kerala, Jharkhand and West Bengal exceeded the debt target, while Madhya Pradesh overshot the fiscal deficit target. Haryana and Uttar Pradesh met both the criteria. Rajasthan, Kerala and West Bengal are projected to surpass the Finance Commission XV targets for debt and fiscal deficit in 2022-23.

The States own tax revenues (SGST, States’ excise duties and sales tax) of Madhya Pradesh, Punjab and Kerala have been declining over time, making them fiscally more vulnerable. For most of these States, non-tax revenue (general services, interest receipts and economic services) has remained volatile, dropping significantly in recent years. The declining own tax revenue and non-tax revenue affect the States’ expenditure planning and increase their dependence on market borrowings.

In these 10 fiscally vulnerable States, the share of revenue expenditure (the government spending that does not lead to the creation of fixed assets) in total expenditure is in the range of 80-90 per cent. States with higher debt-GSDP and higher IP-RR ratios pay higher interest for the State Development Loans (SDL). SDL is a bond issued by State governments to fund the fiscal deficit. The interest is paid half-yearly and principal at 10 years maturity. This makes it critical for States to consolidate their fiscal position to lower their cost of borrowing.

As per the RBI report, it was 7 per cent for Telangana for 2020-21. Haryana, Kerala and Maharashtra had 7.4 per cent, 7.2 per cent and 7 per cent respectively. Others ranged from 6.5 to 6.9.

Contingent liabilities of States, which are the obligations of the governments to pay in the event of a default by the borrower, have been rising in recent years. The off-budget borrowings by States have reached around 4.5 per cent of the GDP in 2022. These contingent liabilities have surpassed 5 per cent of the GSDP in Punjab, Rajasthan, Uttar Pradesh and Andhra Pradesh.

Discom bailouts account for much of the financial burden of State governments. The bailout size of Telangana was Rs 23,662 crore or 1.7 per cent of the 2020-21 GSDP. The bailout to GSDP ratio is higher for Punjab, Rajasthan, Kerala, Andhra Pradesh, Tamil Nadu and Madhya Pradesh.

The debt-GSDP ratio is projected to moderate between 2021-22 and 2026-27. The moderation is attributable to the likely fiscal performance of Gujarat, Maharashtra, Delhi, Karnataka and Odisha. Most of the other States are likely to exceed the debt-GSDP ratio of 30 per cent in 2026-27. Rajasthan, Kerala and West Bengal are projected to exceed the debt-GSDP ratio of 35 per cent by 2026-27.

On the other hand, Telangana’s debt to GDP ratio in 2019-20 was 23.5. As many as 14 States had a higher ratio than Telangana. For 2026-27, the same is estimated to be 29.8 for Telangana. At least 11 other States will have a debt GDP ratio that will be higher than Telangana.

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Author: Howard Caldwell