Freebies & Debt: A Dangerous Cocktail Impacting India - Part I

In November 2022, Indian National Congress released its manifesto for the Himachal Pradesh Assembly election which was full of ‘freebies' — an attempt to gain votes. The grand old party promised free electricity up to 300 units monthly to all households and monetary assistance of Rs 1,500 monthly to women between 18 to 60 years.

One of the major highlights of the campaign was to restore the Old Pension Scheme (OPS) for government employees along with one lakh government jobs. 

With all poll promises, the Congress party returned to power in the hill state in December 2022. However, cut to February 2023, CM Sukhu created a political uproar when he said that there is a situation like Sri Lanka in Himachal and the Jairam government has put the state in an economic crisis. 

While referring to the economic situation of the state, he said that the former BJP government had left a debt of Rs 75,000 crore on us.

Interestingly, amid the fear of economic turmoil in several states, political leaders of different parties are still testing their fate on the back of freebies. In this article, BW Businessworld decodes how a deadly cocktail of freebies and debt is brewing across India.

On the debt situation in the hill state, Saket Dalmia, President, PHD Chamber of Commerce and Industry (PHDCCI) said, "Himachal Pradesh is expected to catch up as there has been a recovery in all economic activities. Hotels, transport and hospitality are likely to grow faster and the state will generate adequate revenues from these economic activities. This would help to solve the financial challenges and fasten the recovery process in Himachal." 

Notably, every government in the state actively promotes tourism to increase investments and experts noted that this will be conducive to sustaining the long-term trajectory of the Himachal.  

Srinath Sridharan, Author, Policy Researcher and Corporate Advisor said, "In general, the states need to have a quick debt reduction plan. In order to do that, cash flows have to be aided, not by simply increasing sin-tax (on alcohol and tobacco), but by creating a conducive atmosphere for increased business potential. This would need helping the SME and MSME units to scale up to have a larger revenue pool, which would help the state in taxation and employment generation."

The RBI has been a prudent regulator and the national debt manager. It has been highlighting the risks of higher state-level risks. But then it is now up to the central government to flag this off in the various interactions it has with the states.

While talking about Himachal CM's statement, RP Gupta, Economist and Author said, "No, I don't agree. For many years, their per-capita income has been higher and the poverty ratio is lower than the national average. Yes, in the past few years, its debt/SGDP ratio has exceeded 42 per cent of SGDP which is not sustainable without support from RBI and Centre."

Debt and Indian states—

As India positions itself as one of the fastest-growing economies in the world, Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana turn out to be the states with the highest debt burden.  

Interestingly, the public debt of PM Modi's Gujarat jumped from Rs 3.20 lakh crore to Rs 3.40 lakh crore registered at the end of March 2022.  Even, the Comptroller and Auditor General (CAG) last year had warned Gujarat against increasing public debt and it noted that the state was “falling into a debt trap”.

While presenting the state’s annual budget, the government revealed the latest data on February 28. According to the news agency PTI, Mona Kanadhar, Principal Secretary (Economic Affairs), Gujarat's Finance Department said, “Our earlier estimates had suggested Gujarat’s public debt will be Rs 3,50,000 crore. But, as per the latest revised estimates, it stands at Rs 3,40,000 crore. By next year, it will go up to Rs 3,81,000 crore as per our estimates."

Notably, every resident of Gujarat has Rs 48,500 debt on them in comparison to Rs 46,000 last year. While replying to the opposition's questions assembly, the state government mentioned that it had paid Rs 23,063 crore in interest on public debt in the FY 2021-22 and Rs 24,454 crore in debt was reduced and paid in installments.

PHDCCI's Dalmia stated that the underlying reason behind mounting debt is that a major chunk of the borrowings is used to service debt whereas the remaining small part is used for capital outlays.

Also Read: Freebies & Debt: Finding The Right Balance Part II

In Punjab, 92.2 per cent of the borrowings are used to service debt during the last three years, 73 per cent of borrowing in Himachal Pradesh is used to pay for liabilities and Rajasthan and West Bengal also spend 90 per cent on revenue accounts which affects the quality of expenditure and it is also reflected in their high revenue spending to capital outlay ratios. 

"The rate of gross fixed capital formation is a low, high burden of interest payments for debt servicing, growing preference for distribution of freebies and adverse impact on specific sectors like tourism and hospitality due to Covid-19," Dalmia added. 

Although as per the RBI report, the debt-GSDP ratio is projected to moderate between 2021-22 and 2026-27 for all the states taken together. The moderation in the ratio is primarily attributable to the stellar fiscal performance of a few states like Maharashtra, Delhi, Karnataka and Odisha. 

Experts also noted that falling growth from 2016-17 onwards and the imposition of GST has caused difficulty in several states particularly, in such states; which have low industrial-base and the fiscal-debt burdens are higher. 

The credit or deposit ratio of various States is varying from 25 per cent to 139 per cent; that needs justice. RBI must flow more credit to all such states having a lower CD ratio. More so, in the past few years, productive finance has been substituted by consumption finance; that must be reversed. 

"The Centre must grant special incentives for private investment and exports and central projects may be prioritised in such states. However, the Centre may put some conditions for cutting wasteful expenses, " Gupta suggested. 

The cumulative debt of the eastern state of West Bengal is Rs 5.86 lakh crore, while debt per capita is around Rs 60,000. When the CM Mamata Banerjee-led Trinamool Congress took charge of the office in 2011, the total debt was Rs 1.97 lakh crore. The WB government in the budget for 2023-24 has proposed to secure money from the market to the tune of Rs 79,000 crore from Rs 75,000 crore it mentioned in 2022-23.

Sridharan added that many of the Indian states face a debt situation simply because they have had lazy budgeting so far. The states have not built or promoted themselves to attract investments that can leverage the talent and resources in the state. 

"Every state will continue to have good resources, equally with constraints. But that’s where political and policy leadership is needed in ensuring investments in the state. The states have to realise that they actually compete with each other for the attention and capital of the investors," added Sridharan. 

Aam Aadmi Party-led Punjab is also in a financial mess as RBI in a report stated that it is amongst the few states which are under high public debt. Interestingly, the state's outstanding debt is more than 50 per cent of its GDP. This is also more than four times its revenue for the financial year 2022-23. 

In Punjab, in 2020-21, the total amount of debt-servicing consumed 99.44 per cent of its gross borrowing of Rs 32,258 crore, 2020- 21 and the debt is being serviced by taking a fresh loan.

Down south, another state is also dealing with a debt situation. India's central bank in its report on state finances for FY23 mentioned that Kerala’s debt-GSDP ratio stood at 39.1 per cent from 28.9 per cent in FY16.  

The total outstanding liabilities of the southern state are estimated at Rs 3,90,859.5 crore in the 2022-23 budget as compared to Rs 1,62,271.5 crore in the financial year 2016. 

Amid the Covid-19 pandemic, the state's outstanding liabilities rose majorly from Rs 2,67,585.4 crore in FY20 to Rs 3,10,856.2 crore in FY21. Also, the debt-GSDP ratio increased from 32.5 per cent to 38.9 per cent respectively.

Like several other states, Kerala too had spent money on welfare schemes which included supplying free food kits to every household during the Covid-19 lockdown.  

Meanwhile, in the debt-GSDP ratio list, Mizoram stood at the first position in the key indicator with a ratio of 53.1 per cent, Punjab (47.6 per cent), Himachal Pradesh, (41.9 per cent) and Rajasthan (40.2 per cent) while Kerala stood at ninth rank in the current fiscal. 

Note: This article is divided into two parts to provide a better understanding of the current situation. Stay with us to explore the subsequent sections and gain further insights.

Also Read: Freebies & Debt: Finding The Right Balance Part II