Uttarakhand: Weak economy that could get crippled without Centre's support

The hilly state going to polls early next year needs to set its finances in order, and address the employment challenge

Twenty-one years after its formation, Uttarakhand remains a complex landscape with enough potential to prosper, yet struggling to cope due to internal and extraneous factors. 

The hilly state has immense tourism potential, but experts say that the hospitality industry in the state is “low-end,” or one that does not offer premium and value enhancing services. Most of the tourism is limited to religious travel, and the cash-rich kind of Rajasthan, Kerala and Goa is not a reality in Uttarakhand. 

During the past decade, the state has also surfaced as one of the most affected by erratic and extreme weather events which have created new impediments in its potential to attract visitors. 

But how has the Uttarakhand economy changed over the past few years? 

Unlike its parent state Uttar Pradesh, which still derives a lot of its economic power from agriculture, Uttarakhand’s economy is mostly manufacturing based, with the sector contributing 35 per cent to its gross state value added.

While one may think that tourism would also be a major contributor, it is not so. Trade and hospitality, wherein the former occupies a bigger share among the two, contributed only 17 per cent to GSVA. This is an outcome of the “low-end” tourism industry in the state, experts said. 

Overall economic growth has faltered in recent years, even before the pandemic hit, in line with how the national economy behaved in the aftermath of demonetisation, GST implementation, and shadow-banking crisis in the 2016-2019 period. Uttarakhand’s real GSDP growth fell from 9.8 per cent in 2016-17, to 4.3 per cent in 2019-20. 

In nominal rupee terms, the economy fell 4.2 per cent in 2020-21, the first year into the pandemic. While the state government has projected that it will grow 14.4 per cent in the current financial year (2021-22), it is heavily dependent on the economic recovery. 

Though manufacturing occupies the lion's share in its economy, its absolute size at Rs 75,000 crore offers little might to pull new investments in the state without governmental support. In fact, its manufacturing prowess is also declining: the sector which grew at a compounded annual growth rate of 10 per cent every year from 2011-12 to 2016-17, grew at 2.3 per cent from 2016-17 to 2019-20. 

To address this, how has been the fiscal support from the state government? 

Annual spending has increased 57 per cent since the current government took over the reins in April 2017. Growth in capital expenditure is a bit slower at 53 per cent over the same period. In fact, expenditure in general and capex in particular stagnated from 2017-18 to 2019-20. 

Spending on health, social welfare and rural development has more than doubled under this government, led by the Bharatiya Janata Party, while that on education has risen by 50 per cent over four years (2017-18 to 2020-21).

Though government spending supports growth, it is primarily derived from private sector activity. As estimates for that are not available, we look at labour participation and unemployment rates compared to the national average. 

Labour force participation rates in Uttarakhand has improved over the period from 2017 to 2020, according to the Periodic Labour Force Survey. While it was 33.2 per cent in July 2017-June 2018 (compared to India’s 36.9 per cent), it increased to 41 per cent in July 2019-June 2020 (compared to India’s 40.1 per cent). 

Unemployment rates (UER) in the hilly state, however, have largely remained higher than national average. While India’s UER improved from 6.1 per cent to 4.8 per cent from 2017-18 to 2019-20, Uttarakhand’s UER stagnated above 7 per cent. Urban unemployment in the recent quarters of 2020-21 has been marginally worse compared to India. 

If government spending gives a fillip to growth and employment, and if both are faltering, what is impeding spending? Uttarakhand does not have storng revenue mobilisation characteristics. 

Rather, its dependence on the central government for financing its expenditure has only risen in the last two years. 

Grants-in-aid contributions, or untied grants from the Centre, occupy close to 50 per cent of the state’s total receipts. Without them, the state would struggle to spend even half the amount it spends currently. 

Its own tax revenue contributes close to 30 per cent, while its share in central taxes adds another 17 per cent. But revenue is not the only problem here. 

As for most other states, Uttarakhand’s committed spending takes the steam further out of its spending ability. Interest payments, salaries, and pensions take away 46 per cent of its total expenditure (2021-22 budget estimate). 

This leaves tiny room for capex and developmental revenue expenditure. While the former occupies 20 per cent share, the latter takes up 34 per cent in the spending mix. 

This financial year, which is being referred to as the year of economic recovery, Uttarakhand is wasting its strong revenue mobilization with poor speed of expenditure. 

In the first seven months of the financial year, the state government has mobilized 55 per cent of the annual budgeted own tax revenue, 46 per cent of share in central taxes, 43 per cent of grants from Centre, and 29 per cent of non-tax revenue. The three big revenue streams have clicked. 

But, it has spent only 27 per cent of its planned annual capex till October, while 37 per cent of its estimated revenue spending. A lackluster performance on the expenditure side, at a time when the government is facing an election.