By Benjamin Lyngdoh
The origins of government debt (also called sovereign/public debt) can be traced to the Late Middle Ages in Europe spanning the 14th and 15th centuries. It is related to the 100 years’ war (1337 to 1453) between England and France which started due to ‘Edward the Third’ claim to the French throne. Facing hardship to effectively finance the war, Edward turned to the banks in Florence for loans/debt. His inability to repay the debt in full resulted in ‘sovereign debt’ which in contemporary structure of democratic government and governance is commonly termed ‘government debt’.
The government debt of Meghalaya has been steadily increasing over the years. There is also an indication that the state government is using new debt to repay old debt and including the interest payments on old debts. It is a dangerous scenario where increasing debt can lead to Meghalaya becoming a defaulter state in future. Now, the extent of debt that a state can borrow depends upon the creditworthiness of the government. Creditworthiness is evaluated in terms of quantitative parameters like state GDP, fiscal deficit trends, debt to state GDP ratio, per capita income, ability to raise revenue, etc and qualitative parameters such as political stability and governance.
Apart from the annual increase in state GDP and an effort to manage fiscal deficit as per limits set by Fiscal Responsibility and Budget Management (FRBM) Act, 2003; the other quantitative parameters are a dismal reading. The debt to state GDP ratio of Meghalaya is one of the worst amongst Indian states. In the year 2023, Comptroller and Auditor General of India warned about Meghalaya falling into a debt trap by highlighting that government debt has increased by 63.22% from ₹ 9485.08 crore in 2017-18 to ₹ 15481.09 crore in 2021‑22. Since then, the debt to state GDP of Meghalaya is hovering around 38% which is higher than the national average of 30% and hugely exceeding the 20% limit set under FRBM Act. The per capita income of Meghalaya for 2024-25 is around ₹ 1.73 lakh meaning an average income of ₹ 14500 per person per month. This is indicative of the lop-sided development and economic wellbeing of Meghalaya. The ability to raise revenue is less with more than 80% dependence on schemes and transfers from the Government of India.
Political stability is a positive feature; however, governance is largely detached from the aspirations of the masses (unemployment, coal mining complicity, law and order, etc). But since state GDP is the ultimate parameter for the state government to borrow, MDA 2.0 is finding it increasingly easy to borrow with the passage of time. This is one of the reasons for the push to reach the US$ 10 billion economy by the year 2028 and a US$ 16 billion economy by the year 2032. This means that the amount of government debt is only going to increase further in the years to come.
What works?
Government debt is a common feature. All governments carry debt. The real issue is twofold – first, fiscal and borrowing discipline is a must so as not to burden successive governments, and second, the government debt must be invested in productive and long-term assets such as roads, bridges, education, healthcare, social welfare for peoples’ wellbeing, etc. Another advantage of government debt is its long-term repayment periods. In addition, the debt repayment can be negotiated for generous grace periods. There is no international bankruptcy mechanism whereby if a government fails to repay, its assets can be liquidated. The only thing that can happen is that Meghalaya will be classified as a ‘defaulter state’ thereby reducing its capability to raise new debt from the market. Government debt can be and are in fact negotiated and re-negotiated to the extent that they can last for perpetuity. Plus, the practice of taking new debt to repay old debt is a public finance norm (although unhealthy and to be avoided). For Meghalaya, it is unclear as to where the government debt is used? The state government should make the utilisation of debt open for public scrutiny in the interest of transparent and prudent financial governance. Till the time that happens, the continued raising of government debt will be synonymous with ‘the raising of eyebrows’.
What doesn’t?
Consider the state government as a household. If the household uses its borrowings to buy a car to ply as a commercial vehicle for generating revenue, then it is prudent usage of the loan. This is because the borrowing is put to productive use by investing in a long-term asset. It is good for the financial health and well-being of the household and in due course of time, the loan will be repaid from the revenue that the car/taxi generates. However, if the household uses the borrowings for buying groceries due to financial hardship, then this will put the household into a difficult position as the loan is not creating any long-term asset which can be used to generate revenue. In due course of time, the family will be falling into a debt trap. They will have to take new loans to repay the earlier borrowing. If the cycle continues for more than three times, then the household will be in dire financial condition.
If the Government of Meghalaya is using its debt to finance events and festivals, shows and entertainments, concerts and merriment, payment of salaries and pensions, etc, then it is a dire situation portraying financial imprudence. Further, this type of unwarranted usage of debt will result in inflation which in this case is technically termed as ‘over-heating’ of the economy. Over-heating as the inflation has been caused by an imprudent usage of debt. Although the data on this aspect is unavailable, could this be one of the factors for the lop-sided economic well-being of Meghalaya?
Political philosophy
There are no contrasting political philosophies on government debt as is seen between MDA 2.0 and the opposition (in particular VPP). The state government led by MDA 2.0 is pushing hard for economic growth while being oblivious to the social and collective indicators of development such as education, health, environmental degradation through illegal coal mining, etc. On the other hand, VPP has made it amply clear that when it comes to power it will ‘stop giving pain-killers’ to the masses (in particular the youth) by means of festivals and concerts. MDA 2.0 and VPP have conflicting strategies for achieving the vision of a developed Meghalaya – the former is ‘debt friendly’ and the latter ‘debt averse’. When the state elections happen again in 2027/2028, government debt may well become the deciding factor as to which party the voters would vote for. The time is at hand.
(The author can be reached via email on benjamin@nehu.ac.in)
