A study released by Reserve Bank of India (RBI) has underscored that economic slowdown is likely to hamper states' revenue-raising capacity, thereby, adding to their debt burden. The staff study has revealed that though the state government’s position remains to be sustainable in the long run, contingent liabilities, primarily in the form of guarantees issued by the states, pose a serious risk to state government finances.
The report which warns of the strong presence of contingent liabilities calls for a holistic assessment of debt position of states by reckoning their off-budget fiscal position, including the impact of operations of state public sector enterprises.
The study, which involves a debt sustainability analysis covering 20 states for the period 1980-81 to 2012-13, shows debt position, after deteriorating between 1997-98 and 2003-04, has witnessed significant improvement since 2004-05, largely due to favorable macroeconomic conditions as well as policy efforts by the Central and state governments. Despite this, the recent growth slowdown and volatility in the financial markets have raised fresh concerns about the financial health of states, the study points.
It further notes that despite an overall improvement in debt position of the states, some states continue to show signs of fiscal stress and increasing debt burden, which on being combined with economic slowdown, could further deteriorate the debt position of these states.