government debt Archives

States’ rising debt, non-plan spending worries central bank

by Editor | May 25, 2021 | Opinions

By Bappaditya Chatterjee Kolkata, (IANS) Non-productive expenditure of state governments remain a cause for worry and their growing liabilities need redressal, even though there has been some improvement in this regard, the Reserve Bank of India (RBI) has said in a report.

“The rising trend in the committed expenditure to gross state domestic product ratio in recent years is a cause for concern,” the central bank said in its latest report on state finances, calling for steps to step up the output.

Committed expenditure includes interest payment, pensions and administrative services and is set to rise further upon the implementation of the 7th Central Pay Commission recommendations, which may also have a cascading impact on the salaries and pension burdens on states, the RBI said.

Such expenditure is a major fiscal drain on states and inhibit money for development purposes.

The report said one solution is for states to expand faster than the rate at which such expenses are growing. “Capital outlay must go up significantly. But states are not able to step it up dramatically,” Ajitava Raychaudhuri, economist at Jadavpur University, told IANS.

According to the report, states in general raised the average capital outlay to their output by 0.6 percentage points after implementing the steps under fiscal responsibility and budget management from 1.8 percent to 2.4 percent.

“But this is not a significant increase,” Raychaudhuri said.

The report said aggregate capital expenditure of states remained almost stagnant over the years as a proportion to the state output. The banking regulator also said states do not sacrifice growth-inducing expenditures within the overall framework of fiscal consolidation.

“Every state has its own comparative advantage. Each state should identify and develop them via its own resources or public-private partnership. This will create more assets and ensure future flow of income,” Dipankar Dasgupta, economist at Indian Statistical Institute told IANS.

He said tourism was one such area for West Bengal to create productive assets.

Economists said unless states increase their income, they will continue to rely on borrowings and that again will be used to retire old debt. As a result, debt burden only grows without any sign of increases in the states’ gross domestic product or incomes.

“Governance is deteriorating. There is lack of accountability in the system. Someone must oversee states for their unproductive expenditure. Most financing decisions are for political gains,” former professor of Delhi School of Economics B.L Pandit told IANS.

“Capital expenditure has multiplier effect on growth. But states are unable to increase it enough to push growth to a higher level. Majority of borrowed money is spent neither efficiently nor on productive purposes. So the debt burden of the states has not reduced much,” Pandit added.

The central bank said outstanding liabilities of state governments have experienced double-digit expansion since 2012-13, with steady increase in public debt. “The increase in market borrowings of state governments since 2008-09 entails large repayment obligations from 2017-18 onward.”

As on end-March 2016, the outstanding liabilities of West Bengal, for example, stood at Rs.3,088 billion, while for Maharashtra it was Rs.3,793.6 billion. For Uttar Pradesh, it was Rs.3,274.7 billion, Tamil Nadu Rs.2,352.6 billion and Gujarat Rs.2,292.8 billion.

Nonetheless, West Bengal’s debt as percentage of its output improved to 35.5 percent in 2015 from 41.9 percent in 2011. As a non-special category state, it is the worst. For Punjab, the ratio improved to 32.4 percent from 33.1 percent, and for Kerala to 28.5 percent from 31.8 percent.

At the same time, the report said the fiscal health of states deteriorated in 2013-14 with their consolidated revenues turning into deficit after three years. It further weakened in 2014-15, as gross fiscal deficit and primary deficit also increased as proportions to state output.

But the central bank had a ray of hope. “The overall fiscal performance of states is expected to improve with the revenue account turning back to surplus. Such improvement, if sustained, would reduce the debt burden of states.”

(Bappaditya Chatterjee can be contacted at bappaditya.c@ians.in)

India’s rating at risk from government debt levels: Moody’s

by Editor | May 25, 2021 | Corporate

Hong Kong, (IANS) American credit rating agency Moody’s on Wednesday retained India’s outlook at ‘positive’ saying the country’s history of double-digit inflation, high government debt levels, weak infrastructure and a complex regulatory regime have constrained its credit profile, while China featured high on the scale of leverage, or debt, risk for sovereigns in the region.

In its report on Asia-Pacific sovereigns, Moody’s Investors Service also cautioned that a prolonged worsening in asset quality at state-run banks is the main threat to India’s sovereign credit profile and suggested the government provide for higher recapitalisation of stressed banks.

“The main threat to the sovereign credit profile would be via a significant and prolonged worsening in asset quality at state-owned banks, beyond the recognition of bad loans currently under way, that causes contingent liabilities to crystallise on the government’s balance sheet,” it said.

“Our positive outlook on India’s rating is based on our expectation of continued but gradual policy efforts to reduce the sovereign risks posed by high fiscal deficits, volatile inflation and weak bank balance sheets,” it added.

The report also said that implementation of the Goods and Services Tax (GST) and bridging large infrastructure deficit are a difficult task before India’s government.

Moody’s, which has given for India a credit rating at ‘Baa3′ that is just a level above their junk category, said it would consider a rating upgrade after 12-18 months, depending on improvement in macroeconomic parameters.

Public sector banks (PSBs) are currently engaged in an asset quality review (AQR) following a Reserve Bank of India directive, which has led to an increase in bad loans and provisioning.

Industry body Assocham said last week that the slowdown in steel, textiles, aluminium and others coupled by the ongoing AQR is likely to push banks’ stressed assets to Rs.10 lakh crore-mark in the fourth quarter of 2015-16.

“At the end of December (2015), the total stressed assets of all the banks were at Rs.8 lakh crore which is expected to see a significant jump in the current quarter itself,” said a study by the industry body.

It said total stressed assets of banks rose four-fold to Rs.7.40 lakh crore by the end of March 2015 from Rs.2.33 lakh crore as of March 2011.

Assocham noted that in nine months from April to December 2015, gross non-performing assets (NPAs), or bad loans, rose by Rs.1 lakh crore from Rs.2,98,641 crore to Rs.4,01,590 crore.

In percentage terms, gross NPA ratio of public sector banks shot up from 5.43 percent in March 2015 to 7.30 percent by December 2015, while mounting loans have made 11 PSBs report losses of Rs.12,867 crore in Q3 of 2015-16.

Noting that China, which has ‘Aa3 negative’ rating and whose state-owned enterprise (SOE) liabilities are particularly large, Moody’s said on Wednesday that total liabilities in the SOE sector rose to more than 115 percent of GDP in 2015, from under 100 percent in 2012.

“Stress in China’s SOE sector implies a rising probability that some liabilities will crystallize on the government balance sheet. China’s climbing debt burden and sizable contingent liabilities were a key driver of our decision to place a negative outlook on the sovereign rating in March 2016,” the report said.

“Three factors will likely determine sovereign credit trends in the region. First, the degree and nature of the build-up in leverage, and the extent of buffers that counterbalance related risks. Second, how economies respond tothe opportunities and challenges offered by China’s rebalancing,” it added.