State Level Debt–Deficit Dynamics

An analysis of the debt and deficit of states based on the budget estimates of 2016–17 shows that almost half of them have a fiscal deficit target higher than the limit set in the Fiscal Responsibility and Budget Management Act. These states need to focus on the quality of expenditure and elimination of revenue deficit as per the framework proposed by the Fourteenth Finance Commission to enhance state-level capital spending.

After the presentation of the report of the Fourteenth Finance Commission (FFC), the debt–deficit dynamics of states can be analysed in two ways—ex ante and ex post. The ex ante analysis involves identifying policy changes which can create an impact on debt and deficits through the very design of interventions. The introduction of Ujwal Discom Assurance Yojana (UDAY) scheme and increase in the borrowing powers of states to a maximum of 0.5% of the gross state domestic product (GSDP) by the FFC¹ are examples of such ex ante policy interventions that would have an impact on the debt and deficit of states.

On the other hand, ex post analysis captures the effect of interest rates, maturity composition of debt, inflation, and growth in real gross domestic product (GDP) on the changes in the pattern of the debt–GDP ratio. How much did the growth in GDP contribute to the changes in the debt–GDP ratio? What impact did inflation have on the size of the debt? Did high/low primary deficits (deficits net of interest) lead to an upward/downward bias in the debt–GDP ratio?