Tamil Nadu tops market borrowing for third consecutive year, RBI Data Revealed

For the third year in a row, Tamil Nadu has emerged as the State with the highest market borrowings according to data from the Reserve Bank of India (RBI). During the April-February period of FY23, Tamil Nadu’s gross market borrowings through State Development Loans (SDLs) stood at ₹68,000 crore. The State’s Finance Minister Palanivel Thiaga Rajan announced in his budget speech last month that Tamil Nadu planned to borrow ₹1,43,197.93 crore during 2023-24 and make repayments of ₹51,331,79 crore, resulting in net borrowings of ₹91,866.14 crore. In the budget estimates for 2023-24, the Fiscal Deficit is estimated to be 3.25% of the Gross State Domestic Product (GSDP).

Background: Fiscal Health of Indian States:

The Sri Lankan debt crisis, resulting from the pandemic and public policies, has led to an assessment of the fiscal health of Indian states. Prior to the pandemic, the average Gross Fiscal Deficit to Gross Domestic Product (GFD-GDP) ratio of the States was modest at 2.5% during 2011-12 to 2019-20, lower than the Fiscal Responsibility Legislation (FRL) ceiling of 3%. However, there were substantial inter-state variations, with Andhra Pradesh, Kerala, Punjab, and Rajasthan incurring average GFD of above 3.5% of GSDP. Meanwhile, Assam, Gujarat, Maharashtra, Odisha, and Delhi ran ratios less than 2%.

The pandemic led to a sharp decline in revenue, an increase in spending, and a rise in debt to GSDP ratios, resulting in a deterioration of the fiscal positions of the Indian states. Based on the debt-GSDP ratio in 2020-21, Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh, and Haryana were identified as the States with the highest debt burden. These ten states accounted for around half of the total expenditure by all state governments in India.

Identifying Highly Stressed States:

Using a panel of indicators to identify fiscal vulnerability, Bihar, Kerala, Punjab, Rajasthan, and West Bengal were identified as highly stressed states due to the warning signs flashing from all the indicators. The GFD-GSDP ratios of these states were equal to or more than 3% in 2021-22, besides deficits in their revenue accounts (except Uttar Pradesh and Jharkhand). Moreover, the interest payment to revenue receipts (IP-RR) ratio, a measure of debt servicing burden on states’ revenues, was more than 10% in eight of these states.

Exceeding Debt and Fiscal Deficit Targets:

Among the ten identified states, Andhra Pradesh, Bihar, Rajasthan, and Punjab exceeded both debt and fiscal deficit targets for 2020-21 set by the 15th Finance Commission. The Commission has permitted states to maintain the ratio of Fiscal Deficit to GSDP as 3.0% in 2023-24 and 2024-25, with an additional space of 0.5% of GSDP during 2021-22 to 2024-25 on fulfilment of required Power Sector Reforms.