Rising State Subsidies A Cause Of Worry, Says India Ratings
The top five states, with such burgeoning subsidies, are Chhattisgarh, Punjab, Rajasthan, Karnataka and Bihar.
A rise in non-merit subsidies by states due to competitive politics is a cause of worry as they do not have enough fiscal space, according to India Ratings and Research.
Chhattisgarh, Punjab, Rajasthan, Karnataka and Bihar were the top five states in terms of subsidies as a percentage of gross state domestic product during FY19-FY22, the ratings agency said in an April 29 report.
All subsidies, however, are not by definition bad or unwarranted, it said. While merit subsidies such as on basic education are “desirable” and have significant “positive externalities”, non-merit subsidies are not. “Since fiscal adjustments have mostly been carried out by compressing the capex, this growing culture is worrisome.”
Precarious Punjab
Punjab, which ranks second by subsidy given as a percentage of GSDP and eighth by absolute subsidy given during FY19-FY22, is one of the most heavily indebted states of India.
“With the fiscal deficit budgeted at Rs 24,240 crore (4.6% of GSDP), interest burden at Rs 20,320 crore (3.8% of GSDP) and outstanding liability at Rs 2.83 lakh crore, Punjab can ill afford more subsidy,” the report said. “But with the new government in power, which made promises including free power to every household up to 300 units, Rs 1,000 a month to every adult woman and free medical treatment via mohalla clinics, the state is staring at an even larger subsidy bill.”
India Ratings expects the promise of free power to each household up to 300 units alone to more than double the power subsidy bill (FY22BE: Rs 10,621 crore) of Punjab in FY23.
State Snapshot
Even as Rajasthan did not witness assembly elections this year, it’s subsidy amount is budgeted at Rs 18,850 crore for FY22.
The desert state’s fiscal deficit is budgeted at Rs 47,650 crore (4% of GSDP), interest burden at Rs 28,360 crore (2.4% of GSDP) and outstanding liability at Rs 4.77 lakh crore (39.8% of GSDP), the report said.
“The situation in many other states is equally precarious, despite not figuring in the top five either on the basis of absolute subsidy or subsidy as a percentage of GSDP.”
Uttar Pradesh, India’s largest state by population, has fiscal deficit budgeted at Rs 90,130 crore (4.7% of GSDP), interest burden at Rs 43,530 crore (2.3% of GSDP) and outstanding liability at Rs 6.53 lakh crore (34.2% of GSDP) in FY22.
The state is now staring at the impact of the poll promises of the new government on the FY23 budget. That includes free electricity for irrigation and two free cylinders to Ujjwala beneficiaries every year. “The two free cylinders alone is expected to cost the Uttar Pradesh-state exchequer about Rs 2,800 crore.”
The appearance of Chhattisgarh, a relatively new state with limited fiscal capacity, in the top five is a “bit intriguing”.
“The spurt in subsidy in Chhattisgarh took place in FY20 when it had jumped to Rs 20,330 crore from Rs 8,320 crore in FY19.”
One of the reasons for this abrupt jump, according to India Ratings, was the rollout of Rajiv Gandhi Kisan Nyay Yojana under which farmers were given input subsidy by directly transferring the requisite amount into their bank accounts. “The other key areas of subsidy were food and civil supplies, free supply of power to agricultural pumps, agricultural loan waiver scheme, etc.”