State wise loan in india 2021
The Centre’s option 1 (partial borrowing for GST compensation) allows States to borrow up to 3% of their GSDP, with the principal and interest repayable after 2022 from surplus cess collections. However, the actual utilization of this window has been lower.
High borrowings do not necessarily indicate a state’s fiscal crisis as long as revenue receipts cover interest payments. This can be assessed using other metrics, including off-budget debt and guarantees.
Infrastructure development
In India, the infrastructure sector is increasing. The government is making significant investments in road projects, railway infrastructure, and gas pipeline initiatives. These investments are needed to support economic growth. In addition, the government is investing in solar power and digital connectivity to promote job creation. The central government is also incentivizing states to engage in asset monetization and disinvestment by offering them interest-free loans that they do not have to repay for 50 years. These loans are a form of state wise loan in india 2021, which states can use to fund their capital expenditure.
However, there is still a gap between state revenue and expenditure. During the 2015-20 period, states collected 10% less than their budget estimates. In order to balance the deficit, they borrowed money from the Centre. However, the borrowing limit is capped at 3% of the state’s gross domestic product (GSDP). This means that states will need to cut their spending if they want to borrow more.
One of the biggest challenges for state finances is the financial condition of state-owned power distribution companies. These companies are facing losses, and their debt is rising. As a result, they are seeking guarantees from states. This will put pressure on state finances and may lead to unsustainable debt levels.
Another challenge for state finances is the lack of growth in nominal GDP. This has reduced the size of the divisible pool from which the Centre transfers funds to states. In addition, the Centre has been raising revenue through cess and surcharges instead of taxes. This has reduced the devolution of Central taxes to states.
The government is trying to address these issues by increasing funding for states through the Special Assistance to States for Capital Expenditure scheme. The scheme provides states with interest-free loans for up to Rs 15,000 crore. The loans are earmarked for states that carry out the disinvestment of state public enterprises or monetization/recycling of infrastructure assets. The scheme has been introduced to encourage states to invest in these projects and boost the economy. It also offers tax benefits to states and private investors who participate in these activities.
Public sector enterprises (PSEs)
Public sector enterprises are government-owned companies that play an essential role in accelerating economic growth and development. They have the potential to boost private business and promote innovation. They also provide opportunities for employment and help to reduce poverty. These enterprises are vital for the economy, and a country’s success depends on their performance. However, they must be adequately managed to avoid becoming a burden on the state budget. The government should take steps to improve the profitability of CPSEs and increase their market share. It should also invest in new technology, such as the Internet of Things (IoT), which will increase productivity and lower operating costs.
During the COVID-19 pandemic, many states used their additional borrowing capacity to meet revenue expenses. This resulted in an overall decline in capital expenditure. In 2021-22, the Union government earmarked Rs 15,000 crore to encourage states to carry out disinvestments and asset monetization, which could lead to a reduction in debt-to-GSDP ratios. However, utilization of this credit is likely to be low due to the low demand for assets.
State governments have a substantial amount of outstanding liabilities from public-sector enterprises. This primarily reflects the state-owned power distribution companies’ (discoms) losses, which are on the rise. In addition, the state guarantee for loans extended to these companies increases risk and may cause a drain on state finances. In 2020-21, 16 states provided guarantees for loans worth Rs 1.36 lakh crore by discoms.
A company is considered a PSE if the Government has more than 50% of its shares. It can be a publicly traded company or an unlisted public limited company. PSEs are responsible for accelerating economic growth, creating jobs, and providing services to the public. They are the backbone of India’s economy, and they play an essential role in reducing inequalities in society.
The central government has taken steps to improve the financial condition of PSEs by allowing them to borrow from foreign banks and offering tax exemptions. Moreover, it has improved the corporate governance of these companies. The goal is to make PSEs an engine of growth rather than a drag on it. This can be achieved by disinvesting some CPSEs, improving key enterprises, and adding new CPSEs with high-profit margins.
Financial sector
In 2021-22, states are projected to incur 85% of their expenditure as revenue expenditure and 15% as capital outlay (debt components excluded from the analysis). Interest payments and other debt-related expenses account for the remainder. Revenue expenditure primarily includes expenditure on salaries and pensions, while capital outlay results in the creation of assets or lowers liabilities.
Taxes and non-tax income mainly constitute the revenue receipts of the state-level governments. Moreover, the Centre contributes to states’ revenue by contributing its share of central taxes and grants-in-aid. The latter primarily includes the share of the Centre in the GST collection and a statutory allocation for infrastructure. The utilization of these funds has varied across the states. In recent times, the shortfall of revenue has been higher in states such as Tripura and Assam. As a result, the states have to borrow more to maintain their budgeted deficit-to-GDP ratio.
The economic slowdown seen in 2019-20 impacted states’ revenue receipts, which in turn required them to either borrow more or cut expenditures. The COVID-19 pandemic and subsequent lockdowns also exacerbated this situation. In addition, the cess collections used to provide compensation grants to states fell substantially.
As a consequence, state borrowing increased during 2020-21 and 2021-22. During this period, the Centre allowed states to exceed their borrowing limits by up to 5% and 4% of GSDP, respectively. It also granted them an additional 1% of GSDP for implementing four specified reforms. Most of the incremental borrowing was used to finance revenue expenditure.
However, the utilization of this additional borrowing has been below expectations. This could be due to various reasons, including a state’s decision to avoid further borrowing in order to manage its debt levels or a lack of capacity to implement reforms. Nevertheless, the government is continuing to encourage states to raise funds by listing and disinvesting their public companies and by monetizing assets. This will help them unlock the value of their assets and eliminate their holding cost, thus freeing up scarce resources for new projects. The government has set a target of raising Rs 1 lakh crore through such schemes in the current fiscal year.
Social sector
The social sector in India is an integral part of a state’s economy. It includes spending on infrastructure and schemes that benefit the poor. The industry has high growth potential and is critical for India’s development. However, the industry faces challenges due to its high borrowing level and high interest payments. These expenses limit budget allocations for social and infrastructure investments. States must implement fiscal reforms and austerity measures to address these issues.
Expenditures on the social sector are mainly derived from tax and non-tax revenue sources. These expenditures include salaries and benefits to public-sector employees, subsidies to consumers, and spending on education, health, and welfare. Expenditures on healthcare are the highest among all sectors, accounting for more than a third of total spending. State governments are obligated to pay interest on the debt they borrow, which will require them to allocate a larger share of their budgets to interest and debt repayment.
Government revenue is the primary source of state income and is defined as the sum of all taxes and duties. State revenues are collected through a variety of sources, including income tax, excise duty, value-added tax, central GST, and customs duties. The Union Government transfers these funds to the states as grants, which are tied to specific schemes and expenditure avenues. These are based on the recommendations of the Finance Commission (FC).
State budgets have been affected by slowing GDP growth and the COVID-19 pandemic. In 2020-21, state revenue receipts declined by 0.6%. Despite this, states have continued to increase their borrowing to fund capital projects. This will increase the burden on states to raise their revenues and reduce dependence on central transfers.
In 2021-22, states are permitted to incur a fiscal deficit of up to 4% of their GSDP, up from the 3.5% ceiling in 2023-24. The new limit is intended to reduce the dependency on central grants and loans for funding capital expenditure. However, this increase in borrowing will still require states to set aside a more significant portion of their budgets for interest and debt servicing, which will constrain other developmental expenditures.