Managing State Debt and Ensuring Solvency: The Indian Experience

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

An Analysis of Fiscal Policy in an Emerging Economy: Innovative and Sustainable Fiscal Rules in India

“…A similar trend was observed in the ratio of interest payment to GSDP of the state which hovered around 4 per cent. In their study, Rangarajan and Prasad (2012) categorized the states as high debt stressed whose debt/GSDP ratio lies between 30 and 50 per cent and ratio of interest payment to revenue receipt is between 15 and 25 per cent. Accordingly, Punjab could be categorized as a high debt stressed state in the pre-PFRBMA period.…”

Fiscal Sustainability in India at State Level

“…The proportion of market borrowings in total state debt has increased sharply in recent years and comprises almost one-third of the total outstanding debt. On the other hand, the share of loans from the central government has declined over the years (Rangarajan & Prasad 2012;RBI 2012).…”

“…In other words, growth in public debt is presently not at risk of automatically expanding without bound above present levels given current nominal effective interest rates and the strong rates of economic expansion experienced by most states. With the slowdown in the Indian growth rates more recently, achieving fiscal sustainability becomes more difficult and there is a risk that reducing some forms of public expenditure, particularly infrastructure development, may be counterproductive (see Rangarajan & Prasad, 2012 for related discussion).…”

“…The Thirteenth Finance Commission therefore, recommended that non-special category states with revenue surplus or balance in 2007-08 should take steps to achieve the targeted fiscal deficit by 2011-12. Meanwhile to minimize cutbacks in capital expenditure the remaining states with higher revenue deficits should eliminate these gradually in order to achieve the proposed fiscal objectives by 2013-14 (Finance Commission 2009Rangarajan & Prasad 2012).…”

“…However, fiscal deficits and their implications for public debt sustainability at the level of the states have hitherto received much less attention, with the exception of Dholakia, Ram Mohan and Karan (2004) and Prasad, Goyal and Prakash (2004) who have proposed that reducing the primary deficits and revenue imbalances of the states is necessary for achieving debt sustainability. More recently Rangarajan and Prasad (2012) have argued that fiscal reforms are needed to rein in the growth of the states' debt, including fiscal responsi-bility rules at the sub-national level. This paper aims to further contribute to this recent literature on India's fiscal performance at state level by evaluating how persistent fiscal deficits affect the stability and sustainability of public indebtedness.…”