The pandemic has forced all states to increase the share of borrowing to meet expenses
Governments generally resort to borrowing for any shortfall in meeting their expenses. The share of borrowing in total expenditure varies from one state to another because the nature of their revenues is different. The common trend seen in all states is an increased reliance on borrowing during the pandemic.
Governments incur various expenses in the form of salaries, pensions, grants, schemes, infrastructure investments and other operating expenses. Expenditures are covered by income generated from various sources such as taxes, grants, and non-tax expenditures such as royalties, among others. Annual budget documents provide details of estimated expenditures for the year and expected revenues to be generated. Any shortfall is usually covered by borrowing from various sources. Governments also include provisions for borrowing in annual budgets.
Various factors influence the expenditure incurred and the revenue generated, which in turn influence the extent of borrowing by the government. Relying on borrowing to meet expenses is unsustainable as it is a liability for the future. However, borrowings cannot be considered as an isolated number, but from the perspective of the growth of the GSDP and the repayment capacity of the state, in addition to the assets built with these borrowings. Borrowings alone do not reflect a substantial trend.
In a previous story, we pointed out that central debt, as well as state borrowing, has increased during the pandemic. The reliance on borrowing to meet expenses varied from state to state. In this story, we look at data related to state borrowing over the past five years (2017-18 to 2021-22) and analyze trends.
Methodology: Information available in ‘Accounts at Glance’ reports submitted by the respective states to the Comptroller and Auditor General (CAG) is taken into account for the analysis. These reports cover the four-year period from 2017-2018 to 2020-21. For the recently completed 2021-2022 period, we considered data from the “Monthly Key Indicators”. For states where Accounts at a Glance reports were not available for a given year, Monthly Key Metrics reports were considered. The actual figures under “Borrowings and other liabilities” are considered “borrowings” in the story. Actual expenditures are taken into account for “actual budget expenditures”. For purposes of categorization, cumulative data over five years (2017-2018 to 2021-22) is taken into account. States are ranked according to the ratio of borrowing to “actual budgetary expenditure” (ABE) Goa, Delhi and Pondicherry are not included in the analysis as data is not available with CAG. However, it should be noted that the actual amount of borrowing as reported in budget documents may not include off-budget borrowing or off-budget financing which is usually financed with public funds. or controlled public sector enterprises or departmental commercial enterprises, which raise resources through market borrowing on behalf of the state.
In Tamil Nadu, Telangana, Kerala and Haryana, the pandemic has further increased an already higher share of borrowing
According to five-year cumulative data (2017-18 to 2021-22), more than 25% of their actual expenditures (ABE) were covered by borrowings and other liabilities in the case of five states. These states include Haryana, Tamil Nadu, Telangana and Kerala, as well as the northeastern state of Nagaland. In the case of the big four states, the share of debt was already high before the pandemic, which increased further in 2020-21.
In 2019-20, the borrowing share in the case of Haryana was 29%, which increased to 30.2% in 2020-21. It decreased slightly in 2021-22. Tamil Nadu and Telangana had an increasing trend of a higher share of borrowing between 20 and 25%, which increased to 32% and 34% for Telangana and Tamil Nadu respectively in the pandemic year 2020 -21.
In the case of Kerala, the state was showing a year-on-year improvement in reducing the share of debt, but the trend reversed in 2020-21, with the share rising to 29.5% . Nagaland’s higher cumulative share can be attributed to the pandemic. Before the pandemic, government reliance on borrowing was around 6.5%. But in 2020-2021, it rose to 45.9%. The State has not yet recovered, the debts still representing 37.7% of the means of the State to face the expenses.
PA, Karnataka and Rajasthan reduced reliance on borrowing in 2021-22
The five-year cumulative value of 6 states shows that they have achieved around 20-25% of EBA through borrowing. These states showed varying trends over the five years, but the consistent factor was the increased reliance on borrowing during the 2020-21 pandemic.
Andhra Pradesh is among the states that depend the most on borrowing to meet their expenses. It was around 23.5% in 2017-18, which was the second highest for that year. It increased in subsequent years. In 2020-21, 31.8% of its EBA was covered by borrowings. However, borrowings were reduced to 14.3% of EBA largely because the state was not allowed to raise more loans.
Karnataka and Rajasthan also showed improvement with less reliance on borrowing in 2021-22 after the peak of the pandemic that hit 2020-21 while West Bengal’s proportion of borrowing remained almost the same even in 2021- 22.
However, the situation in Punjab shows a different trend. Unlike the PA and West Bengal, Punjab was on track to reduce its reliance on borrowing before the pandemic. But in 2020-2021, it rose to 24.6% from 17% the previous year. In 2021-2022, it increased further to 26.3%.
As was the case with another northeastern state of Nagaland, Manipur also saw a disproportionate increase in the amount borrowed in 2020-21. That year, the state covered 69.5% of its expenditure through loans and other debts.
Gujarat and Madhya Pradesh had an increased reliance on borrowing in 2020-21, contrary to a general trend
Regardless of the overall trend in state borrowing ratios, the COVID-19 pandemic appears to be having a similar impact on almost all states. An example is Gujarat. Before 2020-2021, borrowing constituted around 14 to 16% of the State’s sources of revenue to meet its expenses. In 2021-22, borrowings were multiplied by 1.5, with 22.6% of expenditure covered by borrowings. However, it has halved in 2021-22. Borrowing from Madhya Pradesh also increased 1.5 times in 2020-21, and more than a quarter of the year’s expenditure was covered by borrowing. The situation improved the following year.
Assam and Uttarakhand reported a contrasting trend compared to most states. The use of borrowings has been reduced in 2020-2021 compared to previous years. An increase in grants and contributions came to the rescue of these two states in 2020-21 during the pandemic year. Like other northeastern states, which have smaller budgets, borrowing in 2020-21 disproportionately skewed their generic trend. However, it should be noted that even in 2019-20, Sikkim had a higher share of borrowings.
Pandemic impact visible on Maharashtra which is traditionally less reliant on borrowing
Among the larger states, Maharashtra has traditionally been less dependent on borrowing to meet its expenses. In 2017-18 and 2018-19, it was below 9%. However, borrowing increased in 2019-20 to 15.9%. The volume of borrowings and debts more than doubled to Rs. 53.8 thousand crores. This further increased to Rs. 71.5 thousand crores or 20.8% in 2021-22. The situation has improved in 2021-22 but remains well above the pre-pandemic period. An increase in overall tax revenue contributed to the improvement.
Bihar and Jharkhand also reported a similar trend with increased reliance on borrowing in 2020-21, despite a lower share in previous years. With falling tax revenue, Chhattisgarh had to resort to borrowing in 2019-20 and 2020-21. By contrast, Himachal Pradesh and Tripura are less reliant on borrowing even during the pandemic. A higher grant managed to cover the shortfall.
UP & Odisha have less reliance on borrowing compared to other major states
Uttar Pradesh has the highest expenditure among the states as it is the most populous state in the country. However, borrowing has traditionally been lower. The pandemic has increased borrowing to 15.6% in 2020-21, which is traditionally below 10%. A major contributor to UP revenue is its share of union dues. This comes to the aid of Uttar Pradesh despite own tax revenue from a state with marginal performance. Odisha is another state that is less dependent on borrowing. Non-tax revenue and grants generally offset the deficit instead of borrowing in the case of Odisha.
The pandemic has increased states’ reliance on borrowing
As stated earlier, borrowings or their share alone may not represent the complete picture of a state’s economy, as several factors affect the same. In general, the trend seen across all states is an increased reliance on borrowing in the 2020-21 pandemic year.
In some states, the share of borrowing is lower (as in the case of Uttar Pradesh) although their own tax revenue generation is lower. This is due to the higher share of union taxes and a higher amount of subsidies.
The featured image: Share of loans in total expenditure