Will Telangana's exemplary economic performance help TRS politically?

Almost a decade is over after the disruptive farm debt waiver was awarded by the then UPA government nationwide in 2008-09. Telangana was first to announce it at the state level after its inception, and made farm loan waiver their biggest rhetoric point after Telugu identity to convince the electorate in the 2014 assembly polls.

As a result, K Chandrashekhar Rao, the president of Telangana Rashtra Samithi and current chief minister got the keys to power. His government spent Rs 170 billion in three years on waiving off farm loans. When the last waiver tranche was paid to banks in April 2017, Uttar Pradesh and Maharashtra had not yet spent a rupee on their Rs 300 billion plus farm waivers yet.

While the business activity in and around Hyderabad ensured revenue from sales and service taxes, in erstwhile Andhra Pradesh, the goods and services tax (GST) was introduced in July 2017, and since then, it has signaled revenue risks ahead for many states, with shortfall against the requirement.

But not for Telangana.

Cruising through the teething troubles of GST like a fish through weed-less water, Telangana has emerged as one of the best GST performers. Its GST revenue shortfall against the revenue to be protected is the lowest among big states, making the compensation cess virtually irrelevant for it.

The first state to announce farm loan waiver, the first to give cash subsidy to farmers, and being the best performer under GST, the case of Telangana would be one where the impact of economic might on electoral outcome would be tested in the current times.

Against a shortfall of 13 per cent in the April-August 2018 period for all states put together, in Telangana it was just 3 per cent. Its separated sibling Andhra Pradesh did better: it had a surplus of 1 per cent. This is how, these two states have shown the best GST collection ability among big states since the tax was imposed.

This is also confirmed when we look at the compensation cess the state received in 2017-18. The state budget expected Rs 15 billion from the Centre from the cess account, but at actuals, received only Rs 1.7 billion, simply because it did not need compensation, independent research from National Institute of Public Finance and Policy, a think tank, has demonstrated.

This has ensured strong positioning of the state’s own revenues, making it more independent in managing its welfare schemes, especially towards the farm sector.

Telangana’s own tax revenue (OTR) is the best among all states in India, at 9 per cent of the gross state domestic product (GSDP) in 2018-19. The national average is just above 6 per cent.

This could well be the reason why Hyderabad was silent when Andhra Pradesh was confronting the Centre over special status owing to the financial condition post-bifurcation. Telangana was simply performing well, since it had retained Hyderabad.

When the financial impact of farm loan waiver started receding, the state took the liberty to expand its capital outlay - on building roads and bridges, other infrastructure, state public enterprises, and irrigation. To the extent, that its capital spending (as a proportion of the economy) almost doubled at 5.2 per cent of the GSDP in 2016-17, from 2.8 per cent in 2015-16 (revised estimate). At the same time, its social sector expenditure dropped down marginally to 7.4 per cent of GSDP.

As a result, Telangana’s fiscal deficit grew from being 3.3 per cent of the GSDP to 5.5 per cent in one year. However, changes in spending pattern have helped stabilise the financial health in recent years.

With reduction in capital spend and increased funding to the social sector, with other changes, Telangana has managed to keep the fiscal deficit at 3.5 per cent of GSDP in 2018-19, within the relaxed limit specified by the 14th Finance Commission.

In the social sector, however, its focus on education appears to be falling. From 11.2 per cent of aggregate spending in the year it came to power, the TRS government has brought down the education expenditure to 7.5 per cent of the total spend. Its health expenditure has remained in line with national average.

Recently, Telangana became the first state to dole out cash subsidy to farmers in their bank accounts prior to sowing. The agriculture department gave Rs 10,000 per hectare to every farmer whose land records were clean. This has cost the state exchequer Rs 100 billion, and its outcome on the farm sector in general, and farmers’ incomes in particular, has not been visible yet. This is but one welfare scheme among the many that the state espouses.

The impact of increased welfare spending is partially visible in the state’s debt numbers. From a lower than average debt position of 12.7 per cent of GSDP in 2016-17, Telangana’s liabilities have shot up to 22.2 per cent of GSDP in 2018-19 (budget estimate).

The prudent target for the state is to reduce its debt burden to less than 20 per cent of GSDP before 2023, according to the Fiscal Responsibility and Budget Management Act.

For now, it is the enhanced welfare spending ability with the state government accentuated by exemplary performance under GST which stand out for Telangana.

But will this help TRS and Rao to win votes when the state goes to poll on Friday? That is a tough call, but it is quite likely that the ruling party would be in a better position to reap the benefits of it.