The rapid deterioration in the debt situation of eight states, including Maharashtra, West Bengal, Rajasthan, Punjab and Kerala, has sent alarm bells ringing.

Also Read Small states are more sound fiscally

By the end of the next fiscal, these states will find it difficult to service their debts, both in terms of interest and principal repayments, according to finance ministry officials.

For these states, the ratio of consolidated debt to revenue receipts exceeded 300 per cent, the officials said. Besides unsustainable levels of debt, increasing guarantees and ballooning interest payments threatened to seriously undermine their fiscal positions, they added.

In states like Orissa, West Bengal and Himachal Pradesh, salaries, pensions and interest payments are over 100 per cent of their total revenue receipts, which includes transfers from the Centre.

The outstanding debt of all states has more than doubled in the last five years, from Rs 3,29,171 crore (Rs 3,291.71 billion) in 1997-98 to Rs 6,71,653 crore (Rs 6,716.53 billion) in 2002-03. As a percentage of the gross domestic product, it increased from 23.7 per cent to 29.8 per cent during the period.

Similarly, the outstanding guarantees of 17 major states jumped 162 per cent to Rs 1,66,116 crore (Rs 1,661.16 billion) between 1997 and 2002, pushing them further into the red.

The guarantees extended to public sector undertakings, state electricity boards, co-operatives and special purpose vehicles form part of the states' contingent liabilities. On March 31, 2002, this accounted for 7.2 per cent of the GDP.

During the last five years, interest payments by states too shot up 133 per cent from Rs 30,547 crore (Rs 305.47 billion) to Rs 71,178 crore (Rs 711.78 billion). While in 1997-98, the states earmarked less than one-fifth of their total revenue receipts for interest payments, in 2002-03, they had to set aside almost a quarter of their revenue receipts. As a percentage of GDP, it increased from 2 per cent to almost 3 per cent.

Realising that the Eleventh Finance Commission grossly underestimated the dimension of the debt build-up, the finance ministry now wants the fiscal reforms programme for the states to address this problem.

The ministry now feels that the success of the Medium Term Fiscal Reforms Programme lies in capping states' debt. For this, the steps being considered by the ministry include discouraging the states from seeking recourse to off-Budget borrowings and asking financial institutions like IDBI, LIC, Power Finance Corporation and Hudco to stop insisting on state government guarantees for financing economically unviable projects.