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RBI: States debt-to-GDP ratio worryingly higher: current Affairs Special Series

RBI: States debt-to-GDP ratio worryingly higher: A report by the Reserve Bank of India which has been released recently has indicated that the combined debt-to-GDP ratio of states is might be remained at 31% by end-March 2022. This percentage of debt-to-GDP ratio is a point of concern due to its much higher level than the target of 20% for the year 2022-23.

What is the Debt-to-GDP ratio?

  • It is a numerical term that compares a country’s public debt to the country’s GDP (Gross Domestic Product). 
  • It helps to compare a country’s or state’s ability to pay back on its debts.
  • It also helps to calculate the number of years for paying back its debts.  

An annual publication of RBI which is titled ‘State Finances: A Study of Budgets of 2021-22’ gives an insight of affecting the second COVID-19 wave declines and it also suggests state governments take practical steps to address debt sustainability concerns.

Due to pandemic inducted slowdown, it has been projected that the 15th Finance Commission anticipates the debt-GDP ratio to its high level of 33.3% in 2022-23 (because of the higher deficits in 2020-21, 2021-22, and 2022-23) and gradually go down thereafter to attain a level of 32.5% by 2025-26.

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The RBI report remarked that the budgeted consolidated gross fiscal deficit (GFD) of 3.7 percent of GDP for states for the year 2021-22 is lower than the 4 percent level as advised by the 15th Finance Commission which reflects the state governments’ determination towards fiscal consolidation.

To partially start the time of the revenue shortfall, the report said states increased their duties on petrol, diesel, and alcohol and focused on rationalizing non-priority expenditures to make a way for higher expenditure on healthcare and social services.

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