Burden of cutting public debt may fall on Centre

State debt is expected to have risen in 2016-17 on account of UDAY

The fiscal responsibility and budget management (FRBM) review committee has favoured a debt to GDP ratio of 60 per cent for the general government by 2023. This comprises 40 per cent for the Centre and the balance 20 per cent for state governments.

But state debt, which is already hovering around 20 per cent of gross domestic product (GDP), is expected to have risen in 2016-17 on account of Ujwal DISCOM Assurance Yojana (UDAY). This means that the burden of reducing general government debt will largely fall on the Centre.

Data on outstanding debt positions of the Centre and state governments show that as of 2015-16 (BE), the combined liabilities stood at 69.51 per cent. The Centre’s internal and external liabilities amounted to 48.73 per cent of GDP, while those of the states were 20.78 per cent. 

But state debt might have ratcheted up in 2016-17, as many states took on the debt of their power distribution companies under UDAY. According to reports, the 12 states that signed up for UDAY have issued bonds totaling Rs 1.83 lakh crore. 

A precise picture of state borrowings will be available only when all states reveal their 2017-18 Budgets. But aggregate state debt would be significantly higher than the 2015-16 level.

If trends are anything to go by, it is difficult to see a rapid reduction in debt levels. State debt declined five percentage points — from 25.49 per cent of GDP in 2006-07 to 20.63 per cent in 2013-14 — over eight years when the economy was soaring. 

Economists are sceptical whether state debt can be brought down sharply in the short term.

“Ensuring that the debt to GDP ratio for all states in aggregate declines below 20 per cent would be challenging, particularly as UDAY debt would increase the debt stock of some states in the near term,” says Aditi Nayar, principal economist at ICRA.  

This implies that if general government debt is to be reined in at 60 per cent, the Centre will have to do the heavy lifting.

According to the government’s medium-term fiscal policy, the outstanding debt of the Centre has been budgeted at 44.7 per cent in 2017-18. The government expects to bring it down to 42.8 per cent in 2018-19 and to 40.9 per cent in 2019-20.

While the largest reductions in debt levels are seen when growth is soaring, it is possible that even if the Centre stays on this course, aggregate general government debt (Centre and states put together) might not be lower than 60 per cent in the short term.

Economists are skeptical about achieving this. “While the committee has recommended that the general government debt to GDP ratio be reduced to 60 per cent by 2023, this may be difficult to enforce,” says Nayar. 

Add to this, the uncertainty over these projections. The Centre’s medium-term fiscal policy statement assumes that nominal GDP will grow at 11.75 per cent in 2017-18 and 12 per cent in 2018-19. 

But it is possible that growth may turn out to be lower in 2017-18 as the economy struggles to grow in the aftermath of demonetisation.

The economic survey has projected real GDP to grow at 6.75 to 7.5 per cent in 2017-18. Thus, for the government to achieve 11.5 per cent nominal growth, inflation would have to range between 4.25 and 5 per cent.