Burgeoning Debt Continues to Plague Gujarat’s State Finances

Hitting Rs 2.22 lakh crore at the end of March 2016, the debt has risen due to the rising costs of Gujarat’s infrastructure projects and ill-advised investments in state-owned companies and statutory corporations.

Gujarat’s debt has jumped by more than 22 times since the saffron party came into power in 1995.Credit: PTI

New Delhi: Skyrocketing state debt has been a key feature of the Bharatiya Janata Party’s (BJP) nearly 20-year rule in Gujarat. The state’s debt has jumped by more than 22 times since the saffron party came into power in 1995.

Gujarat’s debt was less than Rs 10,000 crore when the BJP took the reins of power in the state, but has vaulted to Rs 2.22 lakh crore, or 25% of state GDP, as at the end of March 2016.

Gujarat’s outstanding liabilities-to-GSDP ratio during the period is higher compared to other major coastal states. For example, neighbouring Maharashtra’s liabilities during the period averaged at just 21% of its GDP, much lower than that of Gujarat.

During the same period, Karnataka and Andhra Pradesh both had a liabilities-to-GSDP ratio of 23%, lower than that of Gujarat.

Tamil Nadu’s liabilities as a percentage of GSDP varied from 19.6 to 21.2 during 2012-2016.

Gujarat’s debts have reached this staggering level due to the state government’s infrastructure spending binge, ill-advised investment in state-owned companies and statutory corporations and economic mismanagement.

Thanks to the state government’s profligate spending, every resident of Gujarat today carries a debt of Rs 32,949 on his head (Gujarat’s population projected at 6.71 crore in 2017).

Going by the maturity profile of loans taken by the state, repayment of Rs 28,190 crore will be due in 2019-20 and Rs 35,325 crore between 2021 and 2023. Overall, the state will have to repay Rs 94,383 crore, or 52.22% of the total public debt, by 2023, which could put a strain on state’s finances.

The interest payments on the total liabilities as a percentage of revenue receipts of the state for the period 2011-16 ranged between 16.17% and 17.37%, which was more than 15% recommended by the twelfth Finance Commission. This percentage increased to 16.72% in 2015-16 due to higher growth rate of interest payment than that of revenue receipts, according to the national auditor.

Abnormal cost escalation in Gujarat’s infrastructure projects has been a serious problem and drawn attention of the Comptroller and Auditor General (CAG). For example, at the end of March 2016, as many as 70 infrastructure projects in areas of building, highways and water supply were facing delays. Of these, cost escalation of up to 83% was feared in at least 18 projects, while the remaining were projected to require 74% more fund for completion than what was initially estimated, according to a recent CAG audit report.

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“Road and Buildings Department could incur expenditure to the extent of 74.45% on the 52 incomplete projects when compared to the initial budgeted cost. In Narmada, Water Resources, Water Supply and Kalpsar Department, 18 projects remained incomplete incurring expenditure to the extent of 80.38% of the initial budgeted cost,” the CAG said in its 2016 audit report on Gujarat’s finances.

State investments fizzle out

Gujarat’s investment in state-owned companies, statutory corporations and rural banks has yielded negligible returns and added to its debt burden.

As at the end of March 2016, the state government’s investment in statutory corporations, state-run companies, rural banks, joint stock companies, co-operative institutions and local bodies stood at Rs 70,730 crore. The average return on investment in last five years is estimated at 0.25%, while the government paid an average interest of 7.67% on its borrowings during 2011-16.

What is surprising, despite this unsatisfactory return, is that the state stepped up its investment in these entities in recent years. During 2011-16, the state government pumped in Rs 31,551 crore. During 2015-16, it invested Rs 387 crore in statutory corporations, Rs 7,400 crore in government companies and Rs 14 crore in co-operative institutions etc. Out of Rs 7,801 crore invested during 2015-16, 53% (Rs 4,105 crore) was invested in the Sardar Sarovar Narmada Nigam Ltd.

During 2011-16, state government’s fiscal liabilities increased by an average annual rate of 10.26%. In 2015-16, fiscal liabilities grew at 9.28% against 10.52% in 2014-15.

The liabilities comprised internal debt of Rs 1, 73,68 1 crore (79%), public account of Rs 40,347 crore ( 18%) and loans and advances from the centre of Rs 7,062 crore (3%) as at the end of March 2016.

The internal debt comprised mainly of market loans ( Rs 1,15,158 crore) and special securities issued to National Small Savings Fund ( Rs 49,817 crore).

Gujarat’s fiscal liabilities at the end of March 2012 represented 239% of the revenue receipts during the year 2011-12, which reduced to 220% at the end of 2014-15, but again increased to 227% at the end of 2015-16.

The state’s financial management has also been far from satisfactory. For example, in 2015-16, the state borrowed excess money from the market to meet the fiscal deficit and consequently, it ended up overpaying on account of interest cost, which added to its debt burden.

The CAG remarked that the state government could have curtailed the market borrowings to avoid interest burden for the coming years.

Gujarat’s tax-to-GDP ratio, projected at 6.5% in 2016-17, is lower compared to majority of states, showing relative inefficiency in tax collection.

According to paragraph 109 of the Gujarat Budget Manual, rush of expenditure in the closing month of the financial year should be avoided. But the state government violated this basic principle of spending. More than 50% of budgeted allocation on 22 major heads was spent in the last quarter of 2015-16.

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