Government Debt: States’ recklessness a rating risk

Debt with higher interest rates can cost you more in the long run. You could consider paying these off first.

Once again, the main opposition, the Congress party, has attacked the Narendra Modi government, saying that it has pushed the central government into huge debt. The Congress says that the debt of the central government under Narendra Modi has increased to almost three times. It is worth mentioning that at the time when the Congress-led United Progressive Alliance left power in 2014, the central government had a total debt of Rs 58.6 lakh crore, which did increase to Rs 152.6 lakh crore in 2022-23. While this increase looks huge, the reality is that this is not the way to calculate and compare government debt.

Government debt is measured as percentage of GDP at current prices. To put that in context, we see that in the year 2013-14, the total GDP of the country was Rs 112 lakh crore, of which the total debt of the central government was Rs 58.6 lakh crore or 52.2 percent of GDP. In 2022-23, when GDP has reached Rs 272 lakh crore, the total debt and liabilities of the central government at Rs 152.6 lakh crore, are equal to nearly 56 percent of the GDP. Thus, the debt and other liabilities of the central government increased by only 4.4 percentage points. But we also need to understand that the total debt and liabilities of the central government in the year 2018-19 were Rs 90.8 lakh crore, against GDP of nearly Rs 189 lakh crore. That is, the total debt and liabilities of the central government were only 48 percent of the GDP. In fact, in the first five years of the Narendra Modi government, the central government's debt as a proportion of GDP came down by 4.2 percentage points.

But the central government's debt increased during the Covid19 period because on the one hand, there was a contraction (instead of growth) in India’s GDP and it became necessary for the government to adopt measures like medical support to people, COVID vaccination, various types of assistance, exemption in repayment of loans, etc. It was the government's compulsion to borrow for the same, as tax revenue was hardly sufficient to fund huge expenditure during pandemic. In such a situation, the government debt to GDP ratio, which was 50.9 percent in the year 2019-20, increased to 61 percent in 2020-21. But after the pandemic, it has come down to only 56 percent in the year 2022-23.

This is the reason why in March 2023, Congress leader P Chidambaram had admitted that the government's entire focus remained on managing the fiscal deficit and debt; and credit should be given to the government for the same.

States’ Debts Worrisome

While the central government's fiscal discipline has kept its debt within limits, the combined debt of the central and state governments continues to rise. The main reason for this is the financial indiscipline of the state governments. It is worth mentioning that where the total debt and liabilities of the state governments was only 22 percent of GDP in 2013-14, it reached 25.3 percent by the year 2018-19 (before Covid19). However, after that naturally, these debts and liabilities further increased to 31.1 percent of GDP. Therefore, the combined debt of the central government and the state governments (which includes the debt and liabilities of the central government and the liabilities of the state governments towards others excluding the central government) increased from 67 percent in 2013-14 to 89.4 percent in 2020-21. A major contributor to this increase was the increase in the debt and liabilities of the state governments.

According to the Fiscal Responsibility and Budget Management (FRBM) Act, the debt and liabilities of state governments should not exceed 20 percent of their GDP. In this context, the Comptroller and Auditor General of India (CAG) has expressed concern over the rising financial indiscipline of some state governments and their increasing debt and liabilities. The CAG noted that by the year 2020-21, the debt-GDP ratio had exceeded 20 percent in most states of the country. It rose to 49 percent in Punjab, 42.4 percent in Rajasthan, 37.4 percent in West Bengal, 36.7 percent in Bihar, 35.3 percent in Andhra Pradesh and 31.5 percent in Madhya Pradesh. If the debts of state governments’ enterprises and guarantees by state governments were included, then the debt of these states would be 10-20 percent higher than the figures given by the state governments. Punjab’s debt would be as high as 58.2 percent of GDP and Rajasthan’s at 54.9 percent.

Therefore, it can be assumed that although the combined debt of the central and state governments is around 84 percent of the GDP, the CAG estimates that it exceeds 90 percent of the GDP.

Freebies And States’ Debt

It’s notable that the central government’s debt is well within limits, despite huge funding for housing for the poor under PM Aawas Yojna, both rural and urban, with 3 crore houses already built; free food grains to 80 crore people during the pandemic and still continuing; Kisan Samman Nidhi to all farmers holding any agriculture land; free treatment up to Rs 5 lakh for crores of people under Aayushman Bharat; huge expenditure on infrastructure building; production linked incentives to the tune of nearly Rs 3 lakh crore to speed up industrial production; various types of reliefs and incentives as well as vaccination of the entire population during the pandemic. However, many state governments have failed to maintain fiscal discipline, primarily due freebies as identified by a Reserve Bank of India (RBI) study. Punjab spends about 45.5 percent of the total tax revenue on free schemes, Andhra Pradesh about 30.3 percent and Madhya Pradesh about 28.8 percent. As a percentage of GDP, Punjab spends 2.7 percent of GDP to fund free schemes and Andhra Pradesh 2.1 percent. Many states have also announced schemes such as 100-200 units of free electricity, free water and free travel in public transport for women, without any discrimination to all, irrespective of their economic condition. Due to free schemes, thanks to competitive populism, with an aim to fetch votes, the states’ debt and therefore, the overall debt of the country is increasing.

Looming Dangers

When international agencies take account of the total debt in the country, they include not only the debt of the central government but also the debts of the state governments. In such a situation, the continuous increase in the ‘overall government debt’ to GDP ratio in the country becomes a cause of concern. Recently Moody's flagged high government debt and fiscal slippage risks for the Indian economy, which may become a cause of degraded ranking. This impacts, apart from other things, borrowing costs for Indian companies abroad. Such downgrading affects our growth potential adversely.

When freebies are given, politicians indulging in this practice try to legitimise it in the name of ‘welfare state’, while the beneficiaries will hardly object to it. But if this trend of freebies is not stopped, the country may fall into a vortex of debt trap. We have seen the fate of many countries including Venezuela, Sri Lanka, Pakistan, etc. due to freebies. The rising overall debt of the government has already started impacting our credit ranking by global agencies. An economy aspiring to be a global power cannot afford such risks through unthoughtful and ill-conceived freebies. We need to differentiate between ‘freebies’ and ‘entitlements’. We need to help those without shelter with houses, hungry with food, and unskilled with imparting skills; but the country can ill afford free electricity and water to well off. Free scooters, mangalsutra and laptops can certainly not be the way forward, at the cost of fiscal instability, hindering growth.

Ashwani Mahajan is a professor at PGDAV College, University of Delhi, and the national co-convener of the Swadeshi Jagran Manch. Views are personal and do not represent the stand of this publication.