Rising interest, salary and pension expenses increase fiscal risk of states
Chennai: Committed expenditure of states towards interest payment of debt, salary and pension has increased since FY20 and it has returned to the high levels of FY01-05 in case of states like Tamil Nadu, Haryana, Uttarakhand and Punjab. The reversal to defined benefit pension system will further increase fiscal risk of states, finds India Ratings.
The committed expenditure to revenue receipt ratio of states, which had shown a declining trend in the first decade of the current century, has started reversing from the second decade.
Deterioration in the debt to GSDP ratio across most states during FY16-FY23 has significantly increased the interest cost and states are using one-third of their new debt for funding current expenditure against less than 10 per cent during FY16-FY20.
The committed expenditure to revenue receipt ratio across states during FY21-FY23BE is higher than the Finance Commission’s threshold level of 25 per cent, except 22.5 per cent in the case of Odisha. Between FY21 and FY23, Punjab’s ratio stood at 52.5 per cent, West Bengal 41.2 per cent, Kerala 46.3 per cent, Tamil Nadu 42.1 per cent and Haryana 42.2 per cent.
The key reason for the reduction of committed expenditure in the first decade of the century was the adoption of Fiscal Responsibility and Budget Management (FRBM) Act in 2003, Debt Swap Scheme FY03-05 and New Pension System in 2004. The Debt Swap Scheme was a one-time scheme and helped states to refinance their outstanding high-cost loans having interest rate 13 per cent and above with low-cost debt taken either from small savings, union government and/or open market borrowings.
However, in the aftermath of the 2008 Global Financial Crisis, many states had put their FRBM act on hold and/or had come up with a new timeline for fiscal consolidation.
As rising life expectancy has kept the pension burden high due to the defined benefit (DB) system, the recent decisions and announcements by some states to revert to the DB system can significantly increase the fiscal risk for them. Ind-Ra opines that keeping it 25 per cent or lower would provide states with the fiscal space to reorient their expenditure towards more productive heads.
