States handing out competitive grants are on the brink of fiscal collapse, report warns

Warning states against their competitive subsidies, research agency India Ratings said five states – led by Punjab – are on the brink of a deep fiscal crisis as their subsidies are far above sustainable levels in percentage terms of the GSDP. The other states most affected by subsidies between 2018-19 and 2021-22 are Chhattisgarh, Rajasthan, Karnataka and Bihar.

The agency admits that subsidies, by definition, are neither bad nor unjustified. For example, the basic education grant has significant positive externalities and is merit-based, but most grants are non-merit based. While merit grants are desirable, unfounded grants are not. What is worrying is that most of the states which also include Delhi tend to fund subsidies which are mostly unfounded by squeezing capital expenditure due to competitive policy Devendra Pant, chief economist and head of public finance at the agency, mentioned.

The growing culture of handing out pre-election grants has recently been the subject of public discussion, with NK Singh, Chairman of the 15th Finance Committee, publicly opposing it, pointing out the fiscal unsustainability of such giveaways.

Punjab ranks second in grants given as a percentage of GSDP and eighth in absolute grants given in 2019-22 and is also one of the most indebted states with a debt to GSDP ratio of 53.3 % in 2021-22.

With a fiscal deficit budgeted at Rs 24,240 crore or 4.6% of GSDP, an interest charge of Rs 20,320 crore or 3.8% of GSDP, and unpaid debts at Rs 2.83 lakh crore, the Punjab can ill afford more subsidies, according to the report. . However, the Aam Admi party government that came to power last month has made several promises, including free electricity for every household up to 300 units, Rs 1,000 monthly in cash for every woman, and free medical care through Mohalla clinics. All this has Punjab looking at an even bigger subsidy bill, he added. The agency expects the free electricity supply alone to more than double the electricity subsidy bill, which in 2021-22 stood at Rs 10,621 crore.

As for Rajasthan – which does not face Assembly polls this year – its grant for 2021-2022 has been budgeted at Rs 18,850 crore with a budgeted budget deficit of Rs 47,650 crore or 4% of GSDP , interest charge at Rs 28.36 crore or 2.4%, and an unpaid liability at Rs 4.77 lakh crore or 39.8%.

The report also notes that the situation in many other states is equally precarious, based on an absolute subsidy or percentage subsidy from the GSDP.

For example, Uttar Pradesh’s fiscal deficit has been budgeted at Rs 90,130 crore or 4.7% of GSDP for 2021-22, its interest burden at Rs 43,530 crore (2.3%) and outstanding debts at Rs 6.53 lakh crore (34.2% of GSDP), is now looking at the impact of the new BJP government’s poll promises on the 2022-23 budget. The new pledges include free electricity for irrigation and two free gas bottles for the poor every year. The two complimentary cooking gas cylinders alone are expected to cost Rs 2,800 crore.

However, Chhattisgarh, a relatively new state with limited fiscal capacity, ranks in the top five in both absolute grant and given grant as a percentage of GSDP, which is intriguing. The surge in subsidies in the tribal dominated state took place in 2019-20 when it increased to Rs 20,330 crore from Rs 8,320 crore in 2018-19. One of the reasons for this sharp leap is the rollout of the Rajiv Gandhi Kisan Nyay Yojana under which farmers receive input subsidies through direct cash transfers. Other key areas of subsidy are food and civilian supplies, free electricity for farmers, and agricultural loan waivers.

Although it is difficult to establish an unequivocal correspondence between the subsidy and the capex of a State, tax adjustments have most often been made by compressing the capex. Interestingly, small states as well as northeastern states show much higher capital expenditures as a percentage of GSDP than large affluent states, primarily due to higher central assistance to improve air, rail, road, waterways, telecommunications and electrical connectivity. In the region.

On the other hand, affluent states such as Maharashtra, Tamil Nadu and Karnataka, although ranked among the top five in terms of average capital expenditure during the period 2019-22, are much lower in terms of investment as a percentage of GSDP.


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