Kerala heading for huge debt trap, warns RBI

A Reserve Bank of India article has named Kerala among the five highly stressed states with high indebtedness requiring urgent corrective measures.

Published: 19th June 2022 05:18 AM  |   Last Updated: 19th June 2022 05:18 AM   |  A+A-

The Reserve Bank of India. (File photo | PTI)

The Reserve Bank of India. (File photo | PTI)

Express News Service

THIRUVANANTHAPURAM:  A Reserve Bank of India article has named Kerala among the five highly stressed states with high indebtedness requiring urgent corrective measures. The article by a team of economists under the guidance of deputy governor Michael Debabrata Patra comes in the backdrop of the Sri Lankan crisis and is to “put the spotlight on fiscal risks confronting state governments in India, with emphasis on the heavily indebted states”. The report said Kerala, Rajasthan and West Bengal are projected to exceed the debt-GSDP ratio of 35% by 2026-27. “These states will need to undertake significant corrective steps to stabilise their debt levels,” it said.

The article lists 10 states which account for around half of the total expenditure by all state governments. Taking into account the warning signs based on all the indicators, the study picked five highly stressed states — Bihar, Kerala, Punjab, Rajasthan and West Bengal.

The article said Kerala has exceeded the debt target set by the 15th Finance Commission for 2020-21. Kerala and two other states — Rajasthan and West Bengal — are projected to surpass the commission’s targets for debt and fiscal deficit in 2022-23.   

Kerala also figures in the list of states whose share of revenue expenditure in total spending is around 90%. This results in poor expenditure quality. Committed expenditure, including interest payments, pensions and administrative expenses, accounts for over 35% of the total revenue expenditure in five states, including Kerala, leaving limited fiscal space for undertaking developmental expenditure, the article said.

Jharkhand, Kerala, Odisha, Telangana and Uttar Pradesh are the top five states with the largest rise in subsidies over the past three years. In the recent period, state governments have started delivering a portion of their subsidies in the form of freebies. “A multitude of social welfare schemes in the form of freebies will not only put a heavy burden on the exchequer but will also exert upward pressure on yields if they are financed through market borrowing,” it said. The report asks state governments to reprioritise their expenditure to achieve optimum long-term welfare advantages. Also, states should ensure that there is a sunset clause for each social sector scheme, it said.



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