These 5 states are among the most fiscally stressed

22 Jun 2022 , 12:31 PM

According to a Reserve Bank of India article, Bihar, Kerala, Punjab, Rajasthan, and West Bengal are five of the states that are financially the most challenged.

Following the current crisis in Sri Lanka, the RBI performed a thorough analysis of the state’s finances. In its analysis, the RBI came to the conclusion that the Covid-19 epidemic had significantly worsened public finances.

States are in an unusual situation as a result of their propensity for providing monetary subsidies, free utility services, the resuscitation of the old pension system, and the expansion of implicit and explicit guarantees.

Fiscal situation & debt levels

RBI has found that the average GFD-GDP ratio (gross fiscal deficit to nominal GDP ratio) of the states remained moderate at 2.5 percent between 2011- 12 to 2019-20. This is lower than the Fiscal Responsibility Legislation (FRL) ceiling of 3 %.

But then the pandemic arrived, and the states’ budgetary circumstances deteriorated significantly in 2020 with a severe decrease in revenue, an increase in spending, and a sharp rise in debt to GSDP ratios.

The debt-GSDP (gross state domestic product) ratio is likely to reduce between 2021-22 and 2026-27, RBI estimates. It has ascribed the decrease in the ratio mostly to the exceptional fiscal performance of Gujarat, Maharashtra, Delhi, Karnataka, and Odisha.

Punjab is predicted to remain in the worse situation by RBI, with its debt-to-GSDP ratio over 45 percent in 2026—2027, while more than 35 percent is predicted for Rajasthan, Kerala, and West Bengal. According to the RBI, these states will need to take major remedial action to stabilize their debt levels.