Rising Debt Burden May Weigh On Development Expenditure

Bihar Deputy Prime Minister Tarkishore Prasad presented the 2022-23 budget on Feb. 28. This is the government’s second full-year budget. The expenditure projections presented for both 2021-22 and 2022-23 might be overestimated. The state has also seen a sharp increase in its liabilities over the last few years.

Bihar incurred an expenditure of Rs 1.59 lakh crore in 2020-21, excluding debt repayment.

For 2021-22, as per the revised estimates, the government has estimated that it will spend Rs 2.46 lakh crore, implying a 55% increase in spending over the previous year.

As a result of this expenditure target, fiscal deficit in 2021-22 is projected to be 11.31% of gross state domestic product, significantly higher than the 4.5% of GSDP limit permitted by the center for 2021-22. Of this, 0.5% of GSDP becomes available only upon undertaking certain power sector reforms.

For 2022-23, the state has projected an expenditure of Rs. 2.23 lakh crore, excluding debt repayment. The state has budgeted a fiscal deficit of 3.47% of GSDP, which is close to the unconditional limit of 3.5% of GSDP permitted by the Center for 2022-23. An additional 0.5% of GSDP becomes available only upon undertaking certain power sector reforms, increasing the limit to 4% of GSDP.

A portion of the receipts to fund this expenditure comes in the form of central transfers.

For 2022-23, Bihar projects that it will receive Rs 91,181 crore in the form of share in central taxes. This estimate for 2022-23 is in contrast to the estimates presented in the 2022-23 Union Budget. According to the Union Budget, Bihar is estimated to receive Rs 82,139 crore in 2022-23. The Rs 9,042 crore difference implies a gap of 1.21% of GSDP.

Bihar estimates it will raise 24% of its revenue receipts on its own in 2022-23 and the rest will come from the Center.

Most earnings of the state governments are in the form of taxes. Bihar’s ability to raise tax revenue from the state’s own economic resources, known as the own tax-to-GSDP ratio, is among the lowest. Bihar’s own tax-to-GSDP ratio stood at 4.9% in 2020-21. In comparison, the own tax revenue of all states averages around 6.5% of their GSDP.

Devolution and grants are estimated to make up 46% and 29% of Bihar’s revenue receipts in 2022-23 respectively. This also includes grants in the form of GST compensation. In 2022-23, Bihar is estimated to receive Rs 3,500 crore in the form of GST compensation grants.

The state’s revenue could get further impacted in the next financial year with the GST compensation period coming to an end in June 2022. Bihar would need to augment SGST (state GST) revenue as well as other sources of revenue to address the decline in revenue receipts after the discontinuation of GST compensation.

Bihar’s other sources of revenue such as tax on land revenue and taxes and duties on electricity are lower than the national average. The state’s earnings from excise duty is also zero due to the alcohol prohibition in the state.

At the end of 2004-05, Bihar’s outstanding liabilities were at 55.5% of GSDP, which came down to 27.5% of GSDP by the end of 2011-12. Since then, liabilities have been rising again.

The outstanding liabilities are estimated to increase from 32.55% of GSDP at the end of March 2020 to 38.66% of GSDP at the end of March 2023. A higher debt servicing burden in the near-term could impact the development expenditure levels of the state.

Relative to the average all-India state spending as a proportion of total budget, Bihar’s allocation towards education, rural development, social welfare and nutrition has been higher.

The actuals for 2020-21 show that Bihar spent 17% of its budget on education, 10% on rural development and 10% on social welfare and nutrition. States on average had budgeted 15.2% for education and 5.7% towards rural development.

This is part of a series of articles authored by PRS Legislative Research, bringing attention to the priorities laid down by states in their budgets. Read the full article on the Bihar budget on the PRS Legislative Research website.

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