Ahead of the assembly elections in the central Indian states of Madhya Pradesh (MP) and Chhattisgarh, main political parties have promised more welfare schemes, the implementation of which could potentially push back fiscal consolidation achieved by these states in recent years.
After electoral success in Karnataka recently, the Congress is pinning hopes on its five promises to the MP voters for electoral success: cooking gas cylinder at Rs 500 (against market rate of Rs 900), Rs 1,500 to every woman per month, 100 units of free electricity and up to 200 units at half the tariff, farm loan waiver, besides the non-contributory old pension scheme (OPS).
Countering these, the ruling Bharatiya Janata Party (BJP) in the state has already announced that 12.5 million women would get Rs 1,250/month from October which would be hiked to Rs 3,000 in due course. The state government has also rolled out LPG cylinder at subsidised rate of Rs 450/refill for PM Ujjwala and women beneficiaries under Ladli Behna Yojana.
The electoral promises already made by the Congress to MP voters are similar to the ones being implemented by the government in Karnataka run by the party. It is estimated that the newly formed Congress government in Karnataka will have to bear Rs 50,000 crore annually to implement the poll promises, other than the OPS.
Like a few other Congress-ruled states, Chhattisgarh already reverted to OPS last year. Besides already running populist schemes, the Chhattisgarh government has also announced that it would procure 20 quintals – against the earlier 15 quintals — of paddy during the ongoing Kharif season.
As both the states go to polls next month, more announcements from both Congress and BJP are expected.
The debt to GSDP of MP is 28% while it is 27% for Chhattisgarh as against the prudential level of 20%. While the ratio is relatively better compared to many of its peers including Punjab and Rajasthan, these could deteriorate if populist measures like OPS are adopted or continued.
The fiscal deficit of MP is projected to be 4% of GSDP in FY24, up from 3.6% estimated for FY23. It had touched a high of 5.1% during the pandemic year FY21. Chhattisgarh has estimated its fiscal deficit at the prudential level of 3% of GSDP. Of course, these numbers were announced in February and could be revised upwards depending on spending splurge on social sector schemes. Own tax revenues in both states are nearly half of their total tax revenues including central tax devolution.
Thankfully, the pace of capital expenditures was kept in both Madhya Pradesh and Chhattisgarh in the first five months of the current financial year. MP’s capex was 22% of total spending in April-August compared with annual trends of 16-18% whereas Chhattisgarh’s capex was in line with its annual trends. However, these could change in the coming months due to higher spending on welfare and freebies from September onward.
With some states reverting to the OPS for their staff, a Reserve Bank of India (RBI) paper has warned that the fiscal cost of OPS could be as high as 4.5 times that of the NPS in the event of all the states switching to OPS.