States debt-to-GDP ratio alarming: RBI

Mumbai: The combined debt-to-GDP ratio of States is expected to remain at 31 per cent by end-March 2022 which is worryingly higher than the target of 20 per cent to be achieved by 2022-23, according to a RBI report.

The Reserve Bank's annual publication titled 'State Finances: A Study of Budgets of 2021-22' further said as the impact of the second Covid-19 wave wanes, State governments need to take credible steps to address debt sustainability concerns. In view of the pandemic induced slowdown, in its projections, the 15th Finance Commission expects the debt-GDP ratio to peak at 33.3 per cent in 2022-23 (in view of the higher deficits in 2020-21, 2021-22 and 2022-23), and gradually decline thereafter to reach 32.5 per cent by 2025-26. The RBI report noted that the budgeted consolidated gross fiscal deficit (GFD) of 3.7 per cent of GDP for States for the year 2021-22 - lower than the 4 per cent level as recommended by the FC-XV (15th Finance Commission) – reflect the State governments' intent towards fiscal consolidation.

According to the report, in the medium term, improvements in the fiscal position of State governments will be contingent upon reforms in the power sector as recommended by FC-XV and specified by the Centre - creating transparent and hassle-free provision of power subsidy to farmers; preventing leakages; and improving the health of the power distribution companies (DISCOMs) by alleviating their liquidity stress in a sustainable manner.