The Indian States face high expenditure
and low revenue challenge

The recent report of the Reserve Bank of India (RBI) on state finances shows a significant hike in their budgetary spending. It is a major increase as state budgets substantially impact social sector spending and the overall development of the economy. Another reason the states' fiscal policies are crucial is that the aggregate expenditure in the state budgets is generally more comprehensive than the union budget. But, over the past few years, the few state spending has gone up dramatically, and it caused the states to get heavy loans to cover those spending as the revenues could not see a substantial rise.

In the past few years, the COVID - 19 pandemic pushed the union government to initially increase its budgetary expenditure above the planned fiscal spending for the states. Still, the state budgets have regained their pre-eminent role since then.

The most indebted non-special category states are generally poor and middle-income, including Kerala, Punjab, Himachal Pradesh, Bihar, and Rajasthan. The debt burden of the states mentioned above ranged from 38% to 48% of their gross state domestic product (GSDP), which is much higher than the average state debt burden of 28.7%. Likewise, the states with the least debt include both rich and poor states like Delhi, Odisha, Maharashtra, Karnataka, Gujarat, and Chhattisgarh, with their debt ranging from 1.8% to 26.9% of the GSDP.

The increasing liabilities have also bloated the interest payments of the states. The interest costs of Punjab, West Bengal, Tamil Nadu, Haryana, and Kerala range between 18.8% and 20.8% of their total revenue receipts. In contrast, the states with the slightest interest burden were Bihar, Delhi, Jharkhand, Chhattisgarh, and Odisha. Their interest payments were only 4.3% to 8.6% of their revenue receipts. These sharp differences in the debt burden of the states are among other primary concerns.

And this crisis of low revenue and high expenses or high debt burden continues to impact the respective state residents. For example, RBI, while analyzing the financial status of states last year, termed Andhra Pradesh as one of the top 10 high-debt states. According to CAG, it used 65-81% of borrowings for debt repayment between 2016-17 & 2020-21.