Freebies sending states neck deep into debt

In the absence of infrastructure, investment is affected and due to this the development of the state and creation of job opportunities is also affected. It is necessary that the development of the country should be accelerated by curbing the free schemes given by the states. — Dr. Ashwani Mahajan

Prime Minister Narendra Modi has been repeatedly cautioning in his speeches that the politics of free 'revadis' (freebies) is ruining this country. It is seen that in the last one or two decades political parties in different states have been announcing different types of free schemes to woe the voters. Free electricity, free water, free women travel in public transport, cash transfer to all farmers on the basis of their land, free Mangal Sutra, free Laptop, free scooters, free TVs and many such freebies schemes are frequently announced by the states. Many political parties have been the beneficiary of these freebies, who have been successful in capturing the governments in some states. 

The Reserve Bank has said that the state governments are making the public borrowing, over and above what was announced in the budget, which is a matter of concern. In the year 2020, Andhra Pradesh governments raised huge debt over and above announced in the budget. Apart from Andhra Pradesh, the Reserve Bank has cautioned 9 more states that their borrowings have far exceeded their capacity. Of these, Punjab, Bihar, Kerala and West Bengal are said to be under extreme stress. The Reserve Bank report states that the average government borrowing in Punjab, Andhra Pradesh, West Bengal, Haryana and Kerala is more than 5 per cent of their respective state GDP. Government borrowing is 9.6 per cent in Punjab and 6.1 and 6.0 per cent in Andhra Pradesh and West Bengal respectively. Apart from this, it is 5.3 percent in Haryana and 5.1 percent in Kerala.

It is worth mentioning that India is a Union of States, therefore the debt of both the central government and the state governments together is called General Government Debt. The FRBM Committee, in view of FRBM Act 2003, had recommended in 2017 that the debt to GDP ratio of the General Government (both central and state governments) should be less than 60 percent, with the debt limits of the central and state governments to be 40 percent and 20 per cent respectively.

The year 2020-21 was extremely unfortunate for the country and the world. On the one hand, the income of the governments decreased by a huge amount and on the other hand, the expenditure on health, social services and food aid increased enormously, to deal with the pandemic. Naturally, the total liabilities of the Central Government as a proportion of GDP increased from 50.9 per cent in 2019-20 to 61.01 per cent in 2020-21. But after that it decreased to 57.33 percent in 2021-22 and to 55.88 percent in 2022-23. Similarly, the total liabilities of state governments as per cent of GDP, which were 26.66 percent in the year 2019-20, increased to 31.08 percent in 2020-21, which later declined to 28.71 percent in 2021-22 and 27.87 percent in 2022-23. The total liabilities of the General Government (central and state governments together) increased from 77.56 per cent in 2019-20 to 92.09 per cent in 2020-21. After this, it decreased to reach 86.04 percent in 2021-22 and 83.75 percent in 2022-23.

Significantly, both the deficit and the liabilities of the Central Government are very transparent and there is no possibility of misrepresentation of the same. But the same cannot be said about the liabilities of the state governments. Recently, the Comptroller and Auditor General of India (CAG) has also made some observations about the budgetary and fiscal management of the states. In these comments too, concern has been expressed about the debt of the state governments on the basis of the data till the year 2020-21. The CAG says debt to GSDP ratio in most states is higher than the targeted 20 per cent (as per FRBM). It reached 48.98 percent in Punjab, 42.37 percent in Rajasthan, 37.39 percent in West Bengal, 36.73 percent in Bihar, 35.30 percent in Andhra Pradesh, 31.53 percent in Madhya Pradesh, 27.80 percent in Telangana, 27.27 percent in Tamil Nadu and 26.47 percent in Chhattisgarh in 2020-21. It is worth noting that the CAG's figures of debt are different from the figures given by the state governments. And if borrowings of state government enterprises and guarantees given by the state government are also included, then by 2020-21, the debt GSDP ratio in Rajasthan would be 54.94 percent and in Punjab it would be 58.21 percent. In Andhra Pradesh also it has been estimated at 53.77 percent. Notably it has reached 47.89 percent and 47.13 percent in Telangana and Madhya Pradesh respectively. It is 40.35 percent and 40.51 percent in West Bengal and Bihar respectively, and 39.94 percent in Tamil Nadu. If the adjusted liabilities of these state governments as estimated by the CAG are compared with the figures provided by the state governments, it appears to be 10 to 20 percentage points higher. That is, it can be said that the burden of liabilities on the state governments is much more than the figures published by the state governments. Although, the liabilities of the Central and State Governments are more than the prescribed limit as per the FRBM Act, but as per the assessment done by the CAG, the gap of the State Governments with the suggested limit in FRBM, is widening continuously.

Freebies and increasing debt on the states

Regarding Andhra Pradesh, the Reserve Bank of India says that Punjab is the highest spender on freebies. Notably, 45.5 per cent of the total tax revenue is spent on free schemes in Punjab and 30.3 per cent in Andhra Pradesh. Talking about the states' gross domestic product, 2.7 percent of the state's gross domestic product is spent on free schemes in Punjab and 2.1 percent in Andhra Pradesh. Apart from this, in Madhya Pradesh 28.8 percent of the tax revenue is spent on subsidies, in Jharkhand this expenditure is 26.7 percent of tax revenue.

Significantly, according to the assessment of the CAG, the generally debt is more in those states, where more expenditure is being made on free schemes. In this, Punjab and Andhra Pradesh are at the top. Where, the bulk of the total revenue is spent on free schemes. Apart from Andhra Pradesh, Tamil Nadu is another southern state which spends more on free schemes. Although Delhi is far ahead in free schemes, but due to this debt on Delhi does not increase because per capita revenue of the state is almost twice that of the national arrange. However, due to free electricity, free water and free travel in public transport for women by the Delhi government, the financial condition of Delhi has become very precarious. All the promises made by the Aam Aadmi Party before coming to power, such as building 20 new colleges, providing free WiFi, building 20,000 public toilets, creating a women's security force, installing 5 lakh CCTVs, expanding health facilities, creating 8 lakh jobs creation, skill training to one lakh youth etc. have all gone in the air till now. The civic amenities of Delhi are getting badly affected. Far from building new roads, flyovers, schools and colleges, Delhi's health services are also getting badly affected.

When a state spends such a large proportion of its tax revenue on free schemes, its capital spending on essential services and infrastructure will naturally falls short. The debt on the such a state government goes on increasing, due to which social services like education and health as well as transport and other essential services are also affected. For the development of any state, it is essential to increase investment. In the absence of infrastructure, investment is affected and due to this the development of the state and creation of job opportunities is also affected. It is necessary that the development of the country should be accelerated by curbing the free schemes given by the states.

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