Data: Market Loans Now Make Up About 2/3rds of Outstanding Debt of States/UTs
Sai Krishna Muthyanolla
August 7, 2023
Data on the outstanding debt of States/UTs indicates that the total outstanding liabilities of States/UTs tripled in the 10 years between 2011 and 2021, from Rs. 18.6 lakh crores to Rs. 61.5 lakh crores. Market Loans now make up close to 2/3rds of the outstanding liabilities of States/UTs.
The level of public debt remains a key indicator to measure the fiscal strength of an economy. A lower public debt can ease up fiscal space for the governments to implement their policies. Hence, governments aim to limit their liabilities below acceptable debt levels. What constitutes the exact safe level of public debt is difficult to pin down precisely as it depends on the context and other market factors. However, for ease of analysis, classifying debt levels into three bands can really be helpful: a green band, in which fiscal space is ample; a yellow band, in which space is positive but sovereign risks are salient; and a red band, in which fiscal space has run out, and urgent action is needed. In this context, we look at the outstanding liabilities of the States and Union Territories in India.
Total outstanding liabilities of the states/UTs tripled between 2011 and 2021.
In India, most states do not generate adequate non-debt receipts to finance their development needs. As a result, they resort to borrowing. While they are not bad, unnecessary, and uncontrolled accumulation of debt liabilities can pose an issue of financial stability to the states. The enactment of the Fiscal Responsibility and Budget Management Act, 2003 is a step towards reaching sustainable levels of debt.
The total outstanding liabilities of the states and UT’s more than tripled between 2011 and 2021, from Rs. 18.6 lakh crores to Rs. 61.5 lakh crores.  The total outstanding liabilities grew by 15% between 2020 and 2021, whereas between 2011 to 2021, the annual growth has been below 12% except for 2016 and 2017 where the growth stood at 18%. In the aftermath of the COVID-19 pandemic, between 2020 and 2023 Budget estimates, the total outstanding liabilities grew by more than 40%.
Tamil Nadu stood as the top state with the highest outstanding liabilities as per the Budget estimates (BE) of 2023 with Rs. 7.5 lakh crores, followed by Uttar Pradesh at 7.1 lakh crores. Odisha is the only state that reduced in outstanding liabilities in 2023 BE as compared to 2022 Revised estimates (RE).
Market Loans account for more than 60% of the total outstanding liabilities of states.
States can borrow from multiple sources. It can raise market loans, it can seek loans from financial institutions, among others. The data on the ‘Composition of Outstanding Liabilities of State Governments and UTs’ indicate that the share of market loans out of the total liabilities has been increasing consistently.  From 33% in 2011 to 65% in 2023 BE, the share of market loans out of the total outstanding liabilities grew considerably. At the same time, the share of loans from the National Small Savings Fund (NSSF) reduced from 27% to 4%, the share of loans and advances from the centre fell from 7.9% to 7%, Provident Funds declined from 12.5% to 8.1%, and Reserve Fund from 5.6% to 2.6% during the same period.
60% growth in loans by PSBs to corporations & PSUs of States/UTs from 2018-19 to 2022-23
The data on the number of loans disbursed by nationalized banks to corporations and public sector undertakings of the State/UTs during the past five years from 2018-19 to 2022-23 show that there is a growth of more than 60% in the loan disbursals, from Rs. 2.5 lakh crores to Rs. 4.1 lakh crores. In 2022-23, Canara Bank remains the top disburser with Rs. 1,87,813 crores, followed by Punjab National Bank with Rs. 70,143 Crores and State Bank of India with Rs. 66,523 Crores. Between 2018-19 and 2022-23, the loan disbursal from SBI declined by 1%, while that from Canara Bank grew by 57%.  The loans from Punjab National Bank grew from Rs. 5,653 crores in 2018-19 to a whopping highest of Rs. 96, 396 Crore in 2021-22. In 2022-23, it fell marginally to Rs. 70,143 Crore.
Upward growth in lending from NABARD can be seen between 2018-19 and 2022-23.
National Bank for Agriculture and Rural Development (NABARD) is an important agency in the grant of institutional credit for boosting the rural economy.  It lends to states, corporations, co-operatives, specialized corporations, and any other dedicated funds for specific purposes. The data for the past five years about loan disbursals to different corporations under various states indicate a growing trend in credit disbursements.
Under the NABARD Infrastructure Development Assistance (NIDA), loan disbursal at the all-India level stood at Rs. 6,329 Crore in 2022-23, up from Rs. 2,326 Crore in 2018-19. The lending of NABARD to the Rural Infrastructure Development Fund (RIDF) grew from Rs. 27,623 Crore to Rs. 37,317 Crore during the same period. Under the Credit Facility to Federations (CFF), the lending grew from Rs. 29,680 Crore in 2018-19 to Rs. 47,853 Crore in 2020-21. It declined thereafter consecutively to reach Rs. 31,487 Crore in 2022-23.