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Informist, Friday, May. 2, 2025

 

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--Fin secy: Need a process for rating of state development loans 
--Fin secy: Mkt discipline needed for pricing state debt appropriately 
--Fin secy: Need to get back to path of reducing states' revenue gap to zero 
--Fin secy: There is fair amount of opaqueness in state govt finances 
--Fin secy: We have to improve tax-to-debt ratio 
--Fin secy: High debt levels limit India's potential to manage any crisis
--Fin panel Panagariya:Some states need to exercise better fiscal discipline 
--CONTEXT: Fin panel Panagariya's comments at Ashoka University event 
--Panagariya: India may take 5-7 yrs to reach healthy debt-to-GDP ratio
 

 

NEW DELHI – There is a need to bring a market signal to differentiate between profligate states and those which manage their debt prudentially, Finance Secretary Ajay Seth said on Friday. There is a fair amount of opaqueness in state government finances, Seth said, speaking at an event organised by Ashoka University Friday.

 

"Just like external rating agencies do rate India. Today in the Indian market, debt paper of a state government is treated more or less the same, irrespective of whether a state has a gross state domestic product ratio of 50% or it is 20%. There is not much of a difference in the yield. Perhaps we have to think of a way wherein there is a market signal and market discipline has to be brought into that area," Seth said.

 

Seth urged think tanks to develop a framework that can then be used by rating agencies to evaluate states. "The market will make those differentiations, not a question of default. It is a question of how much friction they see in terms of a stress event," he said.

 

Seth said there are 7-8 states that are more industry-friendly and more reform-oriented instead of fueling consumption. "The market does differentiate in terms of the yield between a paper which is 'AAA' (rated) versus a paper which is 'A' and which is 'BBB'. So even starting that process of doing the rating of state development loans will be an important signal to happen," he said.
 

"The 11th and 12th Finance Commissions worked towards it, and that was a period wherein the revenue deficit of the state put together had become zero. So that is something a path we have succeeded, perhaps we have to get back to that path first," Seth said. 

 

"The off-budget borrowings (of states) have come down quite significantly because of one instrument which the government of India could use, which is an article in the Constitution wherein any borrowings have to be permitted by the government of India," Seth said.

 

Seth said the high debt level limits India's potential to manage a crisis like the COVID-19 pandemic. Finance Minister Nirmala Sitharaman had in February urged state governments to focus on lowering their debt burden. The Budget for 2025-26 (Apr-Mar) has set a glide path for the Centre to bring down its debt-to-GDP ratio. The Centre is set to cut its debt-to-GDP ratio to 50.0% in a band of 49-51% by FY31 from 57.1% in FY25.  

 

Echoing Seth's comments, Arvind Panagariya, chairman of the 16th Finance Commission, said some states need to exercise better fiscal discipline. He also said the country may take 5-7 years to reach a healthy debt-to-GDP ratio.  End

 

Reported by Sagar Sen and Krity Ambey

Edited by Saji George Titus

 

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