Gauging impact of freebies promised in elections on state finances

While Telangana and Chhattisgarh are in a better position to offer freebies promised by parties in elections, Rajasthan is in a shaky situation to do so

The impact of freebies announced in the course of electioneering on the economies of four states -- Madhya Pradesh, Rajasthan, Chhattisgarh, and Telangana -- presents a variegated picture.

While Telangana and Chhattisgarh are in a better position to offer the freebies promised by the parties, Rajasthan is in a tricky situation.

Madhya Pradesh is in good shape when it comes to revenue balance but it runs high debt.

Rajasthan: Little space for capital investment

The Bharatiya Janata Party (BJP), the winner, has promised to give LPG cylinders at Rs 450 each to the Ujjwala scheme beneficiaries, increase in financial assistance under the PM Kisan Samman Nidhi to Rs 12,000 a year, procurement of wheat at Rs 2,700 per quintal, increase in old age pension, etc.

Implementing these will strain the already precarious state finances. The state’s debt has never been less than 30 per cent of gross state domestic product (GSDP) in the past 10 years, except the first year of the BJP government, led by Vasundhara Raje Scindia (2014-15). However, it was less than 35 per cent under the BJP government, and crossed 35 per cent in the Congress regime (2018-23). A study by the Reserve Bank of India (RBI) last year classified Rajasthan as one of the five states under high financial stress.

Half of Rajasthan’s revenue expenditure is committed expenditure — salaries, pensions, and interest payments. This, along with other categories of revenue expenditure, leaves little for investment in generating assets. Capital outlays have remained below 15 per cent of total expenditure in the past decade.

Madhya Pradesh: Revenue surplus

Many ascribe the BJP’s staying in power in the state despite almost 20 years of incumbency to its Ladli Behna Yojana, a programme oriented towards females, among other social welfare schemes promised at the hustings. The state government allocated Rs 8,000 crore for the scheme in the Budget for 2023-24. However, starting from October, Rs 1,200 will be given to women aged at least 23 years, as against Rs 1,000 at present.

Barring a couple of years, including Covid-hit 2020-21, the state has been revenue-surplus. As such, it can easily fund these freebies. However, its debt is projected to touch 30 per cent of GSDP this financial year. The state may be incurring debt for capital expenditure, most of which is used for generating assets (capital outlays). However, the revenue-surplus position of the government may be affected by the freebies announced by the government, potentially increasing the size of the government debt.

Chhattisgarh: Manageable debt

The BJP ousted the Congress government in the state on the back of its promises such as filling 100,000 vacant government posts in two years, providing cooking gas cylinders at Rs 500 each to women below the poverty line, monthly travel allowance to students for going to college, constructing 1.8 million houses, providing Rs 1,000 to landless agricultural labourers a year, giving Rs 12,000 to married women a year, procuring 21 quintals of paddy per acre at Rs 3,100 per quintal, etc.

The state has the wherewithal to offer these schemes because it has been maintaining a revenue surplus, except for a couple of years under the Bhupesh Baghel government, notably during the economic slowdown of 2019-20 and 2020-21, and a year in the previous Raman Singh administration (2014–15).

Chhattisgarh’s debt, at approximately 24 per cent of its GSDP, is manageable.

The state, like Rajasthan, has opted for the old pension scheme but the liabilities to the exchequer will become evident in full around 2034, when employees who joined in 2004 begin retiring.

Telangana: Strongest financially

The Congress promised financial assistance of Rs 2,500 per women a month, an LPG cylinder at Rs 500, 200 units of free electricity for all households, annual assistance of Rs 15,000 per acre to farmers, Rs 12,000 per year to agricultural labourers, a bonus of Rs 500 per year for paddy crops, monthly pension of Rs 4,000 for senior citizens, among its six guarantees.

The state is the strongest financially in terms of tax revenue among the four and hence funding these freebies may not be a big problem there. For the past seven years, the state’s tax revenue has accounted for over 60 per cent of its revenue receipts.

Despite this, Telangana experienced a revenue deficit in the first three years of the second term of K Chandrashekar Rao’s government. In contrast, during the initial tenure of the Telangana Rashtra Samithi (now Bharat Rashtra Samithi) rule, the state consistently maintained a revenue surplus. This raises concern about whether the promised freebies will once again push the state into revenue-deficit.