As the debt burden grows on Himachal Pradesh, the Comptroller and Auditor General of India (CAG) in its report raised worries, however, the hill state keeps on raising market borrowings to reimburse revenue and interest, rather than capital manifestations and development initiatives.
According to the CAG report released last month, the overall debt burden on the State went up by 51.01 per cent to Rs 62,212 crore in 2019-20 from Rs 41,197 crore in 2015-16. This sharp spike is because of an increase in internal debt to the tune of Rs 12,666.85 crore and public account liabilities of Rs 8,352.80 crore, it said.
Last year, during the budget session, Leader of Opposition Mukesh Agnihotri also slammed the government and said that it has hidden key economic data in the budget 2021-22. He added that the ruling party has failed to provide solutions for the alarming debt burden.
The report also outlined that overall debt has risen to 14.57 per cent in 2019-20. The number was also high in the pre Coronavirus time. Apart from that, the overall financial liabilities to Gross State Domestic Product (GSDP) has increased to 37.60 per cent in 2019-20 from 36.06 per cent in 2015-16.
“This is unsustainable. The government has to take harsh steps to reduce this debt burden. This debt burden is further compounded by the COVID-19 where the state tourism, travel and hospitality industries have suffered losses to the tune of 30,000 crore for the state exchequer. The central government has bailed out by releasing the roughly 1000 crore revenue deficit grant,” said Founding Partner and Portfolio Manager at CapGrow Capital Advisors, Arun Malhotra.
However, Chief Minister Jai Ram Thakur blamed the earlier Congress government for the poor financial condition. During a public rally on January 08, he said the Congress leaders did nothing to improve this sensitive issue but made matters worse to fulfil its political agenda.
Notably, financial liabilities at Rs 62,212 crore were higher than the objective of Rs 57,518 crore estimated in the Medium Term Fiscal Policy cum Fiscal Policy Strategy (MTFPS ) for 2019-20. About 59 to 77 per cent of the debt receipts were used by the Jai Ram Thakur led state government in order to repay earlier obligations during 2015-16 to 2019-20, the report mentioned.
While talking about the continuous rise in market borrowings to repay interest and outstanding liabilities, Malhotra said, “This is a vicious circle, leading to the debt trap. The State needs to focus on capital creation and Infrastructure developmental activities. The state is currently in deficit and is using the borrowed funds to meet current obligations and interest payments, which will lead to excessive debt.”
Primary reasons behind debt burden:
Talking about the internal debt, the report mentioned that it has spiked by Rs 4,698 crore (77.28 per cent) to Rs 10,777 crore in 2019-20 from Rs 6,079 crore in 2015-16. During 2019-20, a total of Rs 2,985.69 crore interest was paid, according to the report.
“The prime reason has been the fall in revenue receipts and further compounded by the recent COVID-19 that has taken a toll on its major revenue drivers- travel and tourism. The debt of roughly 60,000 crore will further add as the annual interest outgo itself will be close to Rs 5,500 crore,” he mentioned.
He further said that the revenue receipts have been falling, and the state’s own resources contribute close to 33 per cent of revenue receipts (taxes and nontaxes), while the rest comes from the centre as its share of central taxes and grants in aid.
“The recovery of loans granted by the state government to various sectors has been relatively poor. There have been considerable cost overruns in some of the state Infrastructure projects that have led to the loss of revenue as well as an increase in capital expenditure (debt),” according to Malhotra.
Major economic concerns:
Amid the economic recovery, the CAG in the report also revealed the details about the market borrowings of the internal debt with an interest rate somewhere in the range of 6.30 and 9.75 per cent.
“It is a typical debt trap that the state is getting into unless they address the key issues. The recent 15 to 20 per cent pay hike for state employees will add further to the already existing woes of the state government,” he mentioned.
The budget did not reveal any strategy for resource generation or employment creation. Apart from that, it did not mention anything about the existing debt and the probable borrowings in 2021-22 by the state government, Agnihotri said last year.
Malhotra further said that the State needs to expand its share of revenues through other resources. Just solely dependent upon travel and tourism is not sufficient. The state has been building on horticulture as another area, but more needs to be done to make it a meaningful contributor.
“The state needs to spend on infrastructure to provide more tourism facilities and make HP an attractive destination for foreign tourists. It is understandable the complex and limited nature of opportunities available for mountain economies like Himachal, and that is the reason the state needs to diversify its revenue resources in a more sustainable manner,” said Malhotra.
The market loans in 2019-20 were Rs 6,580 crore out of total internal debt receipts of Rs 10,777 crore. Additionally, the repayment of market loans was approximately Rs 2,120 crore out of total internal debt repayments of Rs 6,612 crore. However, as on March 31, 2020, the outstanding market borrowings were Rs 28,142 crore.
“The critical issue that remains in these hilly areas is accessibility. And the challenge for the state is to sustain economic development through tourism by improving infrastructure and accessibility without environmental degradation. This requires higher capital requirements, as difficult topography, harsh climate, and the need for protection from climate hazards like landslides require additional workforce and costs,” he added.
Road to recovery:
Amid the sharp increase in the public debt rate, the State government has fewer funds for capital creations and development. The Himachal government needs to take steps for the augmentation of its tax revenues along with that, it also needs to settle the pending tax claims and improve non-tax revenue, the CAG report suggested.
“The government must curtail the deficit- increase avenues for collecting more taxes, collect past ending tax claims, improve nontax revenues and ensure efficient collection. At the same time, the government should reduce its committed expenditure, and reduce the losses in state PSUs, even to the extent of inviting the private sector through hybrid partnerships to ensure efficiency and more accountability in running these state units. Additionally, the state govt. must fully exploit its hydro potential to create more hydropower plants in the State of HP,” said Malhotra.