States likely to miss debt-to-GDP ratio target of 20% by FY23: Ind-Ra

19 Sep 2018 Evaluate

The India Ratings and Research (Ind-Ra), a subsidiary of Fitch Ratings, has warmed that the states are likely to miss the 20% debt-to-GDP ratio target by fiscal year 2022-23 (FY23) as most of them have not budgeted so far. However it said that the Centre may manage to achieve the debt-to-GDP ratio target of 40% by FY23. The NK Singh committee, which is reviewing the Fiscal Responsibility and Budget Management Act of 2003, has suggested that the fiscal policy try to reduce the debt-to-GDP ratio to 60% by FY23, with the Centre’s at 40% and the states’ combined at 20%, instead of improving the revenue to fiscal deficit ratio.

The rating agency noted that the states’ aggregate debt-to-GDP ratio for FY19 has been budgeted at 24.3% and according to their FY19 budgets, only 10 of the 20 states will have debt-to-GSDP ratio of under 25% in FY19. It highlighted that eight states namely Himachal, Jammu & Kashmir, Kerala, Manipur, Meghalaya, Nagaland, Punjab and Rajasthan had debt-to-GSDP ratios in excess of 30% in FY18, suggesting that the aggregate debt-to-GDP ratio needs to be corrected by 8.92 percentage points between FY18 and FY23.

Although there have been instances of debt-to-GDP ratio declining by over three percentage points in a single year and by over 11% for six years at a go, all these periods were characterised by an average minimum nominal GDP growth of about 14% per annum and average aggregate revenue receipt-to-GDP ratio of around 20%. It said achieving a nominal GDP growth of about 14% looks difficult, though the aggregate revenue receipt-to-GDP ratio has been budgeted at 22% for FY19. Sustainability of debt-to-GDP ratio relies on the primary balance-to-GDP and the rate spread (excess of nominal growth over average interest rate on debt).

According to Ind-Ra, while the median value of the consolidated debt-to-GDP 'BBB' countries was 37.8% in 2017, for India it was a high 69%. But European countries like Italy had a higher ratio at 131.8% and Portugal's stood at 125.7%. It attributed the low revenue base as the major factor for India having the highest debt-to-revenue ratio of 327.1% amongst the median of the 'BBB' countries in 2017 at 165.4%. Higher debt and low revenue levels make India an outlier even in terms of interest-to-revenue ratio, which was 23.7% as against 'BBB' median of 6.3% in 2017. Thus, the way forward is to expand revenue base, and GST is a big step in this direction.

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