States doling out competitive subsidies on brink of fiscal collapse: Report

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

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

The agency admits that subsidies by definition are not bad or unwarranted. For example, the subsidy given to basic education has significant positive externalities and is merit-based but most subsidies are non-merit subsidies. While merit subsidies are desirable, non-merit subsidies are not.

What is worrisome is that most states, which also include Delhi, tend to fund subsidies, which are mostly non-merit ones, by compressing the capex, due to competitive politics, Devendra Pant, chief economist and head of public finance at the agency, said.

The growing culture of doling out subsidies ahead of elections has lately been a topic of public discussion, with NK Singh, chairman of the 15th Finance Commission, publicly speaking against it, highlighting the fiscal unsustainability of these freebies.

Punjab ranks second in terms of subsidies given as a percentage of GSDP and eighth in terms of absolute subsidy given during FY19-22 and is also one of the most heavily indebted states with a debt/GSDP ratio of 53.3 per cent in FY22.

With the fiscal deficit budgeted at Rs 24,240 crore, which is 4.6 per cent of GSDP, interest burden at Rs 20,320 crore or 3.8 per cent of GSDP, and outstanding liabilities at Rs 2.83 lakh crore, Punjab can ill afford more subsidy, according to the report.

However, the Aam Admi Party government that came to power last month has made several promises, including free power to every household up to 300 units, Rs 1,000 monthly cash doles to every woman and free medical treatment via Mohalla clinics. All this has Punjab staring at an even larger subsidy bill, it added.

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

When it comes to Rajasthan -- which does not face assembly polls this year, its subsidy FY22 is budgeted at Rs 18,850 crore with a budgeted fiscal deficit of Rs 47,650 crore or 4 per cent of GSDP, interest burden at Rs 28,36 crore or 2.4 per cent and outstanding liability at Rs 4.77 lakh crore or 39.8 per cent.

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

For instance, Uttar Pradesh's fiscal deficit was budgeted at Rs 90,130 crore or 4.7 per cent of GSDP for FY22, its interest burden at Rs 43,530 crore (2.3 per cent) and outstanding liabilities at Rs 6.53 lakh crore (34.2 per cent of GSDP), is now staring at the impact of the poll promises of the new BJP government on the FY23 budget.

The new promises include free power for irrigation and two free gas cylinders for the poor every year. The two free cooking gas cylinders alone are expected to cost Rs 2,800 crore.

However, Chhattisgarh, a relatively new state with limited fiscal capacity, comes in the top five both in terms of the absolute subsidy and subsidy given as a percentage of GSDP, which is intriguing. The spurt in subsidy in the tribal-dominated state took place in FY20 when it jumped to Rs 20,330 crore from Rs 8,320 crore in FY19.

One of the reasons for this abrupt jump is the rollout of the Rajiv Gandhi Kisan Nyay Yojana under which farmers are given input subsidies by direct cash transfers. The other key areas of subsidy are food and civil supplies, free power for farmers, and farm loan waivers.

Although it is difficult to establish a one-to-one correspondence between the subsidy and the capex of a state, fiscal adjustments have mostly been carried out by compressing the capex.

Interestingly, the small states along with the northeastern states show a much higher capex as a percentage of GSDP than large and well-off states primarily because of the higher Central assistance to improve the air, rail, road, waterways, telecom, and power connectivity in the region.

On the other hand well-off states such as Maharashtra, Tamil Nadu and Karnataka although rank among the top five in terms of average capex spend during FY19-22, they stand much lower in terms of capex as a percentage of GSDP.