States handing out competitive subsidies on brink of fiscal collapse: report

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Warning states about their competitive subsidies, research agency India Ratings said five states led by Punjab are on the brink of deep financial crisis as their subsidies are much higher than sustainable levels in terms of a percentage of the GSDP.

The other top states with a very high subsidy burden are Chhattisgarh, Rajasthan, Karnataka and Bihar between FY19 and FY22.



The agency acknowledges that subsidies are not, by definition, bad or unjustified. For example, the basic education subsidy has significant positive externalities and is performance-related, but most subsidies are non-performance-related subsidies. While performance-related subsidies are desirable, non-performance-related subsidies are not.

Worryingly, most states, including Delhi, tend to fund subsidies that are mostly non-merit-based by compressing capital spending due to competition policies, said Devendra Pant, chief economist and head of public finance at the agency, called.

The growing culture of handing out pre-election subsidies has been a topic of public debate recently, with NK Singh, Chairman of the 15th Finance Commission, publicly speaking out against it, highlighting the fiscal unsustainability of these giveaways.

Punjab ranks second in terms of subsidies as a percentage of GSDP and eighth in terms of absolute subsidies granted in FY19-22 and is also one of the most indebted countries with a debt/GSDP ratio of 53.3 percent in FY22.

With a budgeted deficit of Rs.24,240 crore, equivalent to 4.6 per cent of the GSDP, an interest burden of Rs.20,320 crore or 3.8 per cent of the GSDP and outstanding debts of Rs.2.83 crore, Punjab can hardly afford further subsidies Report.

However, the government of the Aam Admi party, which came to power last month, has made several promises including free electricity for every household up to 300 units, 1,000 rupees monthly cash payments for every woman and free medical treatment through Mohalla clinics. All of this has got Punjab staring at an even bigger subsidy bill, he added.

The agency expects the free electricity offer alone to more than double the electricity subsidy bill, which stood at Rs 10,621 crore in FY22.

When it comes to Rajasthan – which does not face assembly polls this year – its FY22 subsidy is up at Rs. Rupees or Rs are valued at 2.4 per cent and outstanding debt at Rs 4.77 lakh crore or 39.8 per cent.

The report also notes that the situation in many other states is similarly precarious, as measured by absolute subsidy or subsidy percentage of the GSDP.

For example, Uttar Pradesh’s fiscal deficit for FY22 was projected at Rs. 34.2 percent of the GSDP). now stares at the impact of the new BJP government’s campaign promises on the FY23 budget.

New pledges include free electricity for irrigation each year and two free gas bottles for the poor. The two free gas bottles for cooking alone are expected to cost Rs 2,800.

However, Chhattisgarh, a relatively new state with limited fiscal capacity, ranks in the top five for both absolute subsidy and subsidy as a percentage of the GSDP, which is intriguing. The subsidy surge in the tribal-dominated state came in FY2020 when it rose to Rs.20,330 crore from Rs.8,320 crore in FY2019.

One of the reasons for this abrupt jump is the introduction of the Rajiv Gandhi Kisan Nyay Yojana, where farmers receive input subsidies through direct cash transfers. The other key areas of subsidies are food and civilian supplies, free electricity for farmers, and farm credit waivers.

Although it is difficult to establish a one-to-one correspondence between a government’s subsidy and investment, most fiscal adjustments have been made by compressing investment.

Interestingly, the small states, along with the Northeastern states, have much higher capital outlays as a percentage of the GSDP than large and wealthy states, mainly due to higher centralized support to improve air, rail, road, waterway, telecommunications and power connectivity in the region.

On the other hand, prosperous states like Maharashtra, Tamil Nadu and Karnataka, although in the top 5 in terms of FY19-22 average capital expenditures, are much lower in terms of investments as a percentage of the GSDP.

(Only the headline and image of this report may have been edited by the staff at Business Standard; the rest of the content is auto-generated from a syndicated feed.)

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