States' financial profile better in FY23; debt stays high: RBI report

Tiding over the adversities brought in by the pandemic, the fiscal position of the states showed a sharp improvement in FY23. The consolidated gross fiscal deficit (GFD) of the states and Union Territories (UTs) declined from the peak of 4.1 per cent of gross domestic product (GDP) in FY21 to 2.8 per cent in FY22 and FY23.

This level was much lower than the budgeted estimate of 3.4 per cent for the year (FY23), according to the Reserve Bank of India’s Financial Stability Report.

The swift consolidation was primarily driven by a decline in revenue expenditure, coupled with an increase in the states’ tax revenue, led by state GST. For FY24, the states have budgeted a GFD-GDP ratio of 3.2 per cent, which is significantly lower than the indicative target of 3.5 per cent set by the Central government.

In FY21, the GFD had risen because the finances of the states were strained owing to disruptions caused by the first wave of the pandemic.

The report pointed out the capital expenditure (capex) of the states had reached 2.5 per cent of GDP in FY22 and remained at the same level in FY23. Their capex is budgeted to increase to 3.2 per cent of GDP in FY24. 

Revenue expenditure, on the other hand, declined from 14.2 per cent of GDP in FY22 to 13.5 per cent in FY23 (provisional). This has resulted in improvement in the quality of expenditure. The revenue expenditure to capital outlay (RECO) ratio for the states has improved from 7.1 during 2020-21 to the Budget estimate of 5.1 in 2023-24.

Reflecting strong fiscal consolidation efforts of the states, their outstanding liabilities have moderated significantly in the last three years.

After reaching a 15-year high of 31 per cent of GDP at the end March 2021, they came down to 27.9 per cent of GDP by the end of March 2023. The debt service burden of the states, measured in terms of the interest payments to revenue receipts ratio, has also moderated during this period.

The report sounded caution on the high debt of the states. At 27.9 per cent of GDP at the end of March 2023, it is higher than the 20 per cent limit recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee (2018) and warrants further consolidation.

At a disaggregated level, a few large states have debt-to GSDP ratios exceeding 35 per cent, the report added.