Debt-sustainability concerns loom large for states: RBI bulletin

Stress tests show that the fiscal conditions of the most indebted state governments are expected to deteriorate further, with their debt-GSDP ratio likely to remain above 35 per cent in 2026-27, the Reserve Bank of India (RBI), stated in its July 2022 bulletin. The slowdown in own tax revenue, a high share of committed expenditure and rising subsidy burden have stretched state government finances, already hit by Covid-19. The central bank recommended state government to restrict their revenue expenses by cutting down expenditure on non-merit goods in the near term. In the medium term, states must put efforts toward stabilising debt levels, it added. In the long term, increasing the share of capital outlays in the total expenditure will help create long-term assets, generate revenue and boost operational efficiency. Additionally, the state governments should conduct fiscal risk analyses and stress test their debt profiles regularly to be able to put in place provisioning and other specific risk mitigation strategies to manage fiscal risks efficiently.