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Public Debt and Its’ Sustainability: Perspective for a Backward State in India - A Case Study of Orissa

Orissa, despite being a land with rich natural and human resources with 4.74% of India's total land mass and 3.5% of the total population of the country, has remained one of the poorest states in the country today. Nearly 48.06% of its population still lives below the poverty line against the all India average of 35.9%. The growth rate of Gross State Domestic Product (GSDP) of Orissa is not remarkable in spite of the heavy borrowing. The GSDP at constant prices (93-94) of Orissa has increased from Rs. 18,536.66 crore in 93-94 to Rs. 33,042.10 crore in 2005-06, registering an annual compound growth rate of 4.93% (The economic survey of Orissa 2006-07). The per-capita GSDP of Orissa by the end of 2005-06 was Rs. 13,744 as against the all India average of Rs. 60151 (by measuring GSDP at constant prices, 99-00 as the base year) with the per-capita gap at Rs. 6990.The total outstanding debt as on 31.3.2006 is of the order of Rs. 36456.46 crore (Orissa Budget at a Glance 2007-08, published by the Department of Finance, Govt. of Orissa). In terms of Debt to GSDP ratio too, the state Govt. of Orissa had registered an annual growth rate of 16% over the period 1990-91 to 2005-06. This critical debt ridden condition of the state is due to the slow, secular deterioration in the fiscal health of the state. The deterioration in the state's fiscal health has started from the year 1990-91. The revenue surplus state of the 80s has gradually been converted into a revenue deficit state by the end of the 2000. Towards the late 90s, the fiscal situation of the state Govt. of Orissa had become very critical leading to debt to GSDP ratio of 68%. Not only the debt but also the debt servicing in terms of interest payment had increased. The interest payment as a proportion of total revenue receipt was also very high at 40% during 1990-91 to 2005-06.As the state government had to borrow continuously to cover the fiscal imbalances, there is a legitimate concern over the sustainability of its public debt. As per the recommendations of The 12th Finance Commission, the state govt. can approach the market directly for the 70% of the loan component of Central Assistance of the State Plan. The sustainability of the additional borrowing has become a critical issue in the present context because, if the financial market will perceive the debt stock of any Govt. as unsustainable then the further lending to the Govt. will be difficult.