RBI research on potential Sri Lankas among India’s 10 most indebted, some near-bankrupt states

[Music] we are not talking about sri lanka in this episode of cut the clutter but the context is sri lanka because all of us are now fixated on sri lanka the whole world besides ukraine if there is another thing that a lot of countries are thinking about it's sri lanka that how come a country that seemed quite prosperous with great social indicators very healthy economy how did this how did its economy simply vaporize now the answer is answer is if you if you spend more than you earn or you if you earn less than you spend then you get into trouble that's what in hindi we would say remember that old hindi film song but next if you add populism to this first of all you are expensive spendthrift government or spendthrift ceo cfo anything and then you add populism and you say i will print money and i will buy votes with it and if i can't print money i will borrow money that is when countries go bankrupt economies go bankrupt and that's how some of our states in india may be going bankrupt so that is what that is what we are talking about today now reserve bank of india in fact more precisely department of economic and policy research under reserve bank of india they've produced a report where they've done the the vulnerability analysis of the 10 most indebted states in india now i won't go so far as to say that these states or some of these states could be could be as helpless and could be as broken economically as sri lanka if they were not part of a larger republic of a larger system although some states are getting close to that but i would say that all of these states 10 states in their own different ways have made not the same mistakes as sri lanka but have deliberately taken the same policy route as sri lanka where if you carry on there is no there is nowhere else to go but a sri lanka like scenario of course your these states are part of larger republic india larger economy so nobody would left let a state sink in india and maybe that is the reason many of these states are also careless or they will they will make care let me just spray money around now and buy my vote so who are these what are these 10 states that this rbi paper has analyzed so before i get there let me also give credit where it's due it's a lot of names because paper like this needs a lot of hard work there's a lot of data a lot of analysis i am sharing the entire paper with you please read that it's beautifully written graphics are fantastic in fact we are lifting we are borrowing the graphics from there it's a public document so thank you very much the team at rbi which has put this together because these days data is gold economic data is much much more valuable than gold because you get so little of it and when you get it authentically from a source as reliable as a reserve bank of india think tank then you take it seriously although by the way reserve bank of india says that this is this paper is the opinion of the authors not of rbi so this is not exactly an rbi report but this is from an rbi think tank so the authors the head of the team is michael d patra who's a familiar name a senior person then there is a mukherjee sameer ranjan somnath sharma bachendra nanda set rahul so this is a large group of people who put this together so thank you very much for giving us this wisdom and something to talk about you've done a brilliant job now if you if you see this first of all look at the 10 usual suspects these 10 states which which form the bottom when it comes to when it comes to financial health or the top when it comes to indebtedness now if you say my first ayah okay i came first because i borrowed most of all whether i can whether i can repay or not then that is that is something that we might define as race to the bottom so i'm not giving you these states names in the ranks because on different parameters they have different ranks and i will discuss those parameters with you except to say that some states are the are the champions among the usual suspects also so punjab kerala west bengal and of course bihar which is a remarkable state and we'll talk about that in a couple of minutes when i say remarkable maybe to to full proof it i should also i i should also signal that remarkable is in courts now the ten states are punjab rajasthan kerala west bengal bihar andhra pradesh jharkhand madhya pradesh not in the same order but these are the 10 states these 10 states the rbi report tells us or the rbi paper tells us they account for half of all the expenditure of indian states so they may be 10 out of 30 plus but they account for half of total expenditure of indian states now if you look at their interest payments because they borrow nobody gives you money for free you have to pay interest on it if you compare if you take a ratio of their interest payment burden not debt repayment burden because that repayment includes principle also just the interest payment burden then it is higher than 10 percent of states total revenue receipts that is state taxes money the state gets from the center as part of devolution as a share of gst etc then if you look at gross fiscal deficit gross fiscal deficit of the state which means as a contribution to the fiscal deficit of all the states in india each one of the of these states accounts for more than three percent of that so that's a lot of deficit and that's it that's not a that's not the kind of contribution that india wants from its states because this is really a negative contribution andhra pradesh bihar rajasthan punjab top of the pops again top of the pops like that now 15th finance commission they gave the state states targets for their fiscal deficit and debt so these four champions have bested smashed everything they have flunked both their fiscal deficit and debt targets that is andhra pradesh bihar rajasthan punjab then if you see and this is for 2021 so if anything then it would have gotten worse in 2021 22 and probably will get even worse in 20-23 because everybody is moving in the same direction then you have people who haven't done that badly who haven't flunked both papers that is debt and deficit but who flunked one paper so kerala sharkhand west bengal they've missed their debt targets so fiscal deficit maybe they still have pass marks marginally but they failed on their debts targets then you see rajasthan west bengal kerala this rbi paper says it looks like they will miss their fiscal deficit targets for 20-23 so this is getting worse this isn't getting better in fact two states which are exceptions here and who pass with flying colors sort of on both both criteria because everything is relative they are haryana and uttar pradesh then you come to the next point that is the ratio of debt to gstp gstp is to state what gdp is to a country so s in gstp is for state so gross state domestic product now look at that gstp ratio and see the champion of champions punjab in fact i'm quite sure all of your smart people you may have even guessed it so in punjab's case in punjab's case we have data only up to 2021 so punjab 53.3 percent that is for 20 20 21 53.3 percent of gstp is its debt right that is the case that is the finest case of amdhaniya thani kharjar then next again from the top or the bottom depending on how you look at it rajasthan i'm quite surprised to see rajasthan having such a poor performance on so many parameters because rajasthan is a resource-rich state most people most of us also when we think about rajasthan we don't realize it rajasthan now it produces a lot of crude oil and that crude oil brings rajasthan a lot of royalty income so in spite of those royalties rajasthan is doing so badly obviously they've been they've been very profligate also indulging in many freebies we'll come to that in a bit the worst is punjab the second worst is rajasthan the third worst is bihar and then kerala and so on and it then it goes on like that then some other highlights tax revenue of madhya pradesh punjab and kerala and as we speak you will find these graphics running those are all from the rbi paper tax revenues of madhya pradesh punjab kerala they've been declining over time so you would say that economies are growing people are earning more people are buying more so tax revenue should be going up but their tax revenues have been declining over the past five years or so that is madhya pradesh punjab and kerala not necessarily in that order or that ranking number two non-tax revenues of many of these states have been volatile particularly for rajasthan west bengal punjab and kerala non-tax revenues are safe if the government sells some land or some assets things like that so they've been very volatile sometimes they are there sometimes they are not there now we have to understand some basic concepts one is state expenditure and revenue account and one is capital account so just as we say when we are discussing the armed forces budget the defense budget revenue expenditure is something that is that is either pre-committed or spent on consumables or or what is what is not adding any value what's not creating any assets salaries pensions interest payments etc etc etc if you see that then a bunch of states four of these ten states have their spend more than 90 percent of their entire their entire income over revenue expenditure that is they basically pay themselves their staff their officers their retirees etc freebies etc etc so who are the tops here no surprises punjab and kerala 98 90.8 90 that range west bengal almost there 89.6 rajasthan 89.5 again rajasthan is in surprise andhra 88 and everybody all 10 are above 80 percent so everybody is an 80 percenter on the wrong side it won't take them anywhere but towards trouble in fact in this list of 10 uttar pradesh if anything is the least worst at just about 82 percent then you come to another ratio which is revenue expenditure to capital outlay which means if i earn a hundred rupees if a state earns a hundred rupees how much effort of it i spend on myself and on or on buying votes for myself which is through freebies etc and how much do i then have to build new schools new bridges buy new buses for capital expenditure you understand what capital expenditure is there punjab is a big champion its ratio is 16.6 is to one that means for every one rupee punjab can spend on capital expenditure that is to create assets and create things of value it pays 16.6 percent to itself either to its employees or pensioners etc etc etc or by way of interest or by by way of by their freebies which will buy me votes so 16.6 which means if punjab earns 100 rupees there is no way it can spend more than about say five or six rupees on development expenditure that is how little money they are left with in fact if you look at some of our agriculture universities in our states everybody talks about farm bills and agriculture this agriculture that particularly punjab universities like that which have been engines of farm modernization green revolution you will find that almost their entire budget is consumed in salaries allowances pensions etc etc and nothing is left for research research growth development fresh hirings of of a faculty it isn't there so punjab the ratio is 16.6 x that is revenue spending that which is which is basically spending that's consumed and goes away to capital building 16.6 to 1. in kerala it's 12.1 to 1 west bengal 9.721 rajasthan again 9.421 ap 8.8 to 1 and you can see the rest on the chart that we'll put on the screen but i will also tell you generally who are the better off who are the or who are the less words off so madhya pradesh is the least verse 4.9 ups 5.2 and jharkhand is 5.8 so that's a little bit of a saving grace there again we need to understand the difference between revenue spending and capital spending so this report also underlines the fact that revenue spending can if at all give relief or some gain to people for no more than a year salary pensions anything like that whereas if you do capital spending that builds assets for the future which can bring benefits not just in subsequent years but hopefully in many cases for subsequent generations also so this is the same old biblical sort of story of you give a hungry man a fish the man will eat a meal you teach somebody how to fish the person will make a living and will earn to learn to earn a meal every year with learn to earn three meals a day for every day so that is the difference between revenues expenditure and capital expenditure then you think of committed expenditure which means they say worry case may sell salaried employees emi you have to pay emi you have to pay salaries to your staff you have to pay taxes in what you borrowed you have to pay interest if your government is using electricity or a company is losing like using electricity you have to pay those bills so completed expenditure which is salary pensions interest administrative expenses that is more than 35 more than 35 percent of all of the state's revenues for haryana up punjab west bengal kerala and what that does is that leaves much less for development funding so once again see this table that makes it quite explicit and here also top of the pops is my punjab 47.1 they've just been borrowing and spending borrowing and spending and doing ballet ballet kerala again 38.8 very high west bengal 35.5 uttar pradesh on this parameter is not doing too well 36.4 in fact they are worse than west bengal and then there is haryana 35 35.3 next aggregate state government debt the rbi paper says that if you look at all of india then aggregate state government debt is still sustainable but these 10 states these 10 10 states look like they could slip into they could slip into a vortex of instability my these are my words not from the report and the champions in this area and states most likely to become hopefully not sri lanka equivalents within the indian union are number one you guessed right it's punjab it's completely broken economically punjab rajasthan big surprise punjab no surprise rajasthan big surprise punjab rajasthan bihar kerala and west bengal these are the states whose debt is already unsustainable and they did not have the umbrella of the center god knows what would happen now many of these states report points out have also done off borrowings what are off-budget borrowings many of these states have public sector undertakings they borrow state government guarantees those loans so they are off budget you don't see them on the budget but in many cases these are these borrowings are very high and the report tells us that if you add up these borrowings for the states this is 4.5 percent of gdp for these states 4.5 percent of india's gdp that's a bit of serious cash and more than five percent of gsdp it is in punjab rajasthan uttar pradesh and andhra pradesh and this at a time when some of these states as we mentioned to you earlier on are seeing a decline in own tax on tax revenues not a rise in own tax revenues similarly they are seeing an increase in expenditures mainly through freebies and also and also what happens tomorrow because they've been giving out free power and all so their power distribution companies are all broken their power distribution companies are bankrupt and tomorrow if those losses have to be funded then these states will completely go bankrupt in fact there's another table that this paper has it tells you that the net worth of the power distribution companies in nine out of these ten states is now already negative and the report also notes the freebies promised in the recent budgets by these states and they tell you that a state like punjab which is already so deep in debt has promised 17 000 crores of extra freebies punjab is a small budget it's not uttar pradesh 70 000 crores of which 5 000 crores will go for these three hundred units of free power and another twelve thousand crores if the ahmadi party government keeps the promise of giving every woman thousand rupees a month then you see some really bad bad ideas growing now rajasthan and chattisga two congress states they've decided to go back to the old pension scheme which is a defined benefit pension scheme and we'll talk about this concept at some other time but the reason all these states had accepted the new pension scheme was because they realized that to have a defined benefit pension was something unaffordable it would make them bankrupt these two state states have done it fortunately so far this virus has not caught on in other states i keep saying nobody can stop a bad idea time has come but mercifully so far other states haven't caught it because you know what happens it's a very very peculiar thing and if you read this paper they explain it when you shift from new pension scheme to old pensions games it looks like that today you have a benefit in your budget because today you are allocating money the employee contributes something to the new pension scheme that the government contributes in this case you are not doing it now so you you are actually showing up your budget but you are stealing from your children and grandchildren so when these employees now retire then whoever is running the state is going the state is going to go bankrupt so so we are basically borrowing from our children and grandchildren to pay ourselves right now and to buy votes for ourselves right now and this is some states for example punjab andhra pradesh if you look at their situation they've given out so many freebies that their budgets are now hollowed out their fiscal status is now hollowed out if you look at the freebies they give out in terms of as a percentage of their own tax revenues punjab 45.4 percent punjab used to be the richest state in india just about 20 years ago 45.4 percent of overall revenue received 17.1 so 45.4 percent of the taxes it collects by itself for the state that's half of it 17.1 percent of its total income that includes the money that comes from the center for andhra pradesh it's thirty point three percent jharkhand twenty six point seven percent mp twenty twenty eight point eight percent again see the chart and imagine with this year now the compensation scheme to the states from the center on gst will end so these states are going to get even more troubled so this report says that the most vulnerable states right now are punjab tamil nadu mp rajasthan another very interesting thing that the paper does is it strikes it it tries to define freebies and it says exact line while no precise definition is possible they say that the public merit goods like if you invest more in schools more in hospitals if you if you even set up a better pds system give people more people more grain more efficiently or invest in health and that is still a public merit good because it adds value to people's quality of life but if you're using it so that is not a freebie that is welfare spending healthy welfare spending but if you give money away to by way of free electricity free water free public transport ticket less travel free travel in buses whatever or or you keep waving pending bills or power water etc those are freebies and that is not a very good idea and i told you i'll tell you something interesting about bihar from this data that data please look at this chart now this chart tells you what each government each state government of these step 10 state governments these troubled indebted heavily indebted stressed state governments which government's kitty in terms of with government spy of its income comes from where so if you look at these this analysis then states own income is mostly sales tax sgst that is the state gst then there is something called excise now if you see excise and then another another large chunk is the money that comes from the center from the center it either comes by way of devolution which is the state's right from gst etc this state has a right to we are a federal country state has right to a share of central kt of these taxes central taxes so that plus grants from the center and the grants is the key thing politically if you look at that look at bihar look at the purple the purple in this chart is excise and see how tiny that excise earning for bihar is why why has that happened because bihar imposed prohibition a lot of the excise earning comes from liquor that's where our punjab is doing brilliantly because if nothing they're collecting excise on liquor they are not putting any bars there so bihar has very poor excise income and who's paying who's paying bihar government to still survive see their share of what comes from the center is 75 percent 75 percent of bihar government's total income is what comes from central government by way of devolution and by way of grant so you know and others keep demanding special status for bihar if this isn't special status that's three out of the four rupees you earn actually come from the center what else do you want by way of special status you might as well focus and improve your governance and i can give you comparisons jharkhand the central share is 57 that's a 20 that is 20 percentage points almost 20 percentage points precisely 18 percentage points lower than bihar bhatti pradesh is 53 up is 52 west bengal is 55 but bihar is 75 if only bihar had some more some proper excise income if they had not done this very expensive and in my view very very very senseless political move and that's also been done for votes and for populism then they they might have also been in the 60 62 bracket not 75 percent and finally before i let you go remember the three states where in spite of the situation their taxes every year have been declining over five years these are punjab kerala and madhya pradesh so those are the ones that need watching [Music] [Applause] [Music]

Channel: ThePrint

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Keywords: ThePrint, shekhar gupta, theprint india, theprint hindi, rbi report, sri lanka crisis, rbi research, cut the clutter

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Length: 26min 22sec (1582 seconds)

Published: Thu Jul 14 2022