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Debt-to-GDP ratio of Centre and states

Topics Covered:

  1. Indian economy and issues related to inclusive growth.

 

Debt-to-GDP ratio of Centre and states

 

What to study?

  • For Prelims: Meaning of Debt- to- GDP ratio- related key facts for Prelims.
  • For Mains: Increasing Debt- concerns, challenges and measures to address them, recommendations by FRBM Committee.

 

Context: The centre has released a Status Paper on Government Debt for 2017-18.

 

Key findings:

  • The Centre’s total debt as a percentage of GDP reduced to 46.5% in 2017-18 from 47.5% as of March 31, 2014.
  • The total debt of the States has risen to 24% in 2017-18, and is estimated to be 24.3% in 2018-19.
  • In absolute terms, the Centre’s total debt increased from ₹56,69,429 crore at the end of March 2014 to ₹82,35,178 crore in 2017-18, representing a 45% increase. The total debt of the States increased from ₹24,71,270 crore to ₹40,22,090 crore over the same period, an increase of almost 63%.

 

Key takeaways:

  • While the Centre is moving in the right direction in terms of meeting the N.K. Singh Committee recommendations on public debt, the States are moving in the opposite direction.
  • Outstanding liabilities of States have increased sharply during 2015-16 and 2016-17, following the issuance of UDAY bonds in these two years.
  • The increase in the debt stock at the State level is worrying because they don’t have the wherewithal to service the debt if it goes beyond a certain point. They could then start getting into a debt trap situation.

 

Recommendations by N.K. Singh committee:

The N.K. Singh-headed FRBM (Fiscal Responsibility and Budget Management) Review Committee report had recommended the ratio to be 40% for the Centre and 20% for the States, respectively, by 2023.

It said that the 60% consolidated Central and State debt limit was consistent with international best practices, and was an essential parameter to attract a better rating from the credit ratings agencies.

 

Way ahead for states:

The States do have some fiscal space to reduce their borrowing in the coming years due to the large cash surpluses they hold. This indicates scope for reducing the quantum of market borrowings by State governments in case they bring down their cash surpluses (parked as investment in treasury bills of the Central government).

State governments as a group have exhibited a tendency to hold large cash surpluses/investments in Cash Balance Investment Account on a consistent basis while at the same time resorting to market borrowings to finance their GFD (Gross Fiscal Deficit).

 

Sources: the hindu.

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