Several states in the country resorting to offering freebies like farm loan waiver and restoring the old pension system, is a matter of concern, as it could further hamper their fiscal burden, according to a report by SBI Research. States such as Telangana, Rajasthan, Kerala, Bihar, and West Bengal, have announced populist schemes in recent assembly polls. These schemes are economically unsustainable and a recipe for disaster given the financially bad shape of many states. These schemes also limit states’ flexibility to spend on development projects.
The capital expenditure of states in FY 2022 grew by a whopping 36.2 per cent in the face of the multi-year nature of pandemic, since state governments needed to scale up their health infrastructure. This in turn impacted their fiscal deficit budgets. “A collateral casualty of the pandemic seems to be the fiscal situation of states, as our comprehensive analysis of finances of 18 states demonstrates that the average fiscal deficit (as % of GSDP) has been revised upwards by 50 bps to 4.0% for FY22,” according to SBI’s Ecowrap report published Monday.
Fiscal deficit as a percentage of gross produce is as high as 8.3 per cent for Bihar, while for Assam it stands at 4.5 per cent in FY 2022. In absolute terms, Bihar exceeds its fiscal deficit by Rs 54,327 crore and Assam exceeds its fiscal deficit by Rs 21,935 crore of its budgeted estimate, according to the report penned by Soumya Kanti Ghosh, SBI Group Chief Economic Adviser.
Another example is the state of Telangana which has committed 35% of revenue receipts to finance the several populist schemes. “In terms of percentage of states’ own tax revenue it is as whopping as 63%. Clearly, this is unsustainable and might be a potential recipe for fiscal disaster going forward,” the report said. States like Rajasthan, Chhattisgarh, Andhra Pradesh, Bihar, Jharkhand, West Bengal and Kerala have also committed to spend 5-19% of its revenue receipts on such schemes. Clearly, states seem to be currently living beyond their means, the report added.
States have fixed committed expenditures every year such as salary to government employees, interest payments and pension payments, however if there is an increase in expenditure of these fixed components, it hampers investments in development and growth oriented programs. These committed expenditures have steadily been on the rise in the last three years with its share in the revenue receipts now standing at 56% in FY 2023 budgeted figures, SBI report said.
“Incidentally, a larger proportion of the budget allocated for committed expenditure items limits the state’s flexibility to decide on other expenditure priorities such as developmental schemes and capital outlay,” it added.
