Increased indebtedness of states: Report

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According to the recent Crisil report, the indebtedness of the states will remain at the highest level in this decade.

According to this report, despite the revenue boosting recovery after the global pandemic, the total indebtedness (debt to Gross State Domestic Product (GSDP)) of states is expected to rise to 33% in the current financial year. .

Higher revenue inflows will be fragmented by an increase in revenue expenditure due to the following:

  • Higher committed expenses (related to salary, pension and interest costs).
  • Higher necessary developmental expenditure (eg; grants-in-aid, medical and welfare expenditure).

Excess borrowings by states can affect the following:

  • Interest rates charged in the economy.
  • Availability of finance for businesses to invest in new factories.
  • The ability of the private sector to provide employment to new workers.
  • Additionally, a high debt-to-GDP ratio could create a situation where states would use their revenue expenditure to pay more and more interest payments instead of creating new assets.

Recent steps taken to improve state finances:

  • The Center has increased the borrowing limit for the states from 3% of GSDP at present to 5%.
  • The Center has released around Rs 80,000 crore as grants to the states under the National Health Mission.
  • The scheme of financial assistance to the states for capital expenditure has been started.

Source – The Hindu

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