States’ Debt Burden Surges to a 15-year High

State finances are a major causality caused by the pandemic. This was because the pandemic was a double whammy for the states. On the one hand, the extensive spread of the virus and the resulting lockdown badly hit the states’ revenues, which come largely from consumption taxes. On the other, the states, which are on the front line of the battle against the pandemic, were also forced to (increase) up their spending on health, social welfare and in other critical areas. The widened gap bet­ween growth of revenues and expenditures has forced the states to borrow huge funds to meet immediate needs.

Consequently, as pointed out in the report “State Finances: A Study of Budgets 2021–22” published by the Reserve Bank of India, the state debt burden shot up by almost 5 percentage points to touch 31.2% of the gross domestic product (GDP) by March 2021. This is a 15-year high. The debt levels are now far above the targeted 20% debt to GDP ratio set for 2022–23 by the Fiscal Responsibility and Budget Management (FRBM) Review Committee in 2017. In fact, the Fifteenth Finance Commission now expects the states’ debt to GDP ratio to move up to 33.3% of GDP in 2022–23 and only then slow down marginally to 32.5% by 2025–26.