Dr Ashwani Mahajan
Elections are being held in five important states of the country starting from November 7 to November 30, 2023. Elections are actually festivals of our democracy. Due to the continuous and peaceful tradition of elections after independence, India has emerged as not only largest democracy, but also as one of the strongest democracy in the world. Election is the time for political parties to inform voters about their policies and proposed program, through their election manifestos.
In history, all political parties have been trying to woo voters with their promises in the form of programs, but the nature of election promises has changed in the last decade and a half. In these promises, instead of policies and programmes, announcement of cash transfer and free schemes has taken precedence over policies and programs. Announcement of various freebie, including cash transfers to women, farmers, students and sometimes minorities and weaker sections, free electricity, free water, free travel to the entire women etc., has now become a common phenomenon.
In Madhya Pradesh, apart from waiving off the loans of farmers, the Congress party has also announced many other free schemes like free electricity, gas cylinder subsidy, Rs 1500 per month to women, unemployment allowance of Rs 3000 to youth etc. Similar announcements have been made by different political parties in Madhya Pradesh and other states going into elections. Every possible effort is being made to woo the voters.
In such a situation, it is a matter of concern, whether this is a healthy trend for our democracy. Will our governments be able to fund these free schemes? Will the debt burden on state governments increase with freebies? What impact will these free schemes have on essential government expenditure on health, education and infrastructure? These questions are of paramount importance.
Lessons from other countries
In many countries of the world, there are many examples of government debt increasing due to freebies and many countries have been ruined due to the same. The examples of Venezuela and Sri Lanka etc. show that even reasonably rich countries can face disaster due to freebies; what to talk of poor countries like Pakistan. Currently, due to free schemes in the name of welfare state, there is a long list of many rich countries, which are today under huge debt and are no longer able to fund these schemes any more.
Increasing debt on states
This trend of freebies is now spreading in many states of India. In the elections to be held this month, political parties have made a series of announcements of freebie schemes. We are hearing daily about free electricity, free transport, transfer of money to women, unemployment allowance to youth, etc. along with free vehicles and many other freebie schemes. Some time ago, the Reserve Bank of India and the Comptroller and Auditor General of India (CAG) had published data in their respective reports about increasing debt of the states due to freebies and have expressed concern over these freebie schemes and rising debt burden of the states.
According to the Fiscal Responsibility and Budget Management (FRBM) Act, the target debt-GSDP (Gross State Domestic Product) Ratio, in any state should not exceed 20 percent. But as per CAG, in most of the states of the country this ratio is much more than the targeted one. It reached 48.98 percent in Punjab, 42.37 percent in Rajasthan, 37.39 percent in West Bengal, 36.73 percent in Bihar, 35.30 percent in Andhra Pradesh, 31.53 percent in Madhya Pradesh, 27.80 percent in Telangana, 27.27 percent in Tamil Nadu and 26.47 percent in Chhattisgarh. And if the debt on state government enterprises and the guarantees given by the state government are also added, then by 2020-21 the debt to GSDP ratio in Rajasthan would be 54.94 percent and in Punjab it would be 58.21 percent. In Andhra Pradesh also it has been estimated at 53.77 percent, it is 47.89 percent in Telangana and 47.13 percent in Madhya Pradesh. In West Bengal and Bihar also it’s 40.35 percent and 40.51 percent respectively, and in Tamil Nadu it is 39.94 percent. CAG also reported that the debt of the states is continuously increasing compared to the target ratio. This is a matter of concern not only for these states but also for the entire country.
Regarding Andhra Pradesh, the Reserve Bank says that after Punjab, Andhra Pradesh is the second state in the country with highest spend on free schemes. It is noteworthy that in Punjab, 45.5 percent of the total tax revenue is being spent on free schemes and in Andhra Pradesh expenditure on freebies is 30.3 percent of total tax revenue. Talking about the state’s GDP, in Punjab 2.7 percent of the state GDP is spent on free schemes annually and in Andhra Pradesh its 2.1 percent. Apart from this, in Madhya Pradesh, 28.8 percent of the tax revenue is spent on subsidies, and in Jharkhand it is 26.7 percent.
It is noteworthy that according to the assessment of CAG, the debt is more in those states where higher amount is being spent on free schemes. Punjab and Andhra Pradesh are at the top in this, where a huge part of the total revenue is spent on free schemes. Apart from Andhra Pradesh, Tamil Nadu is another state in the south which spends hugely on freebies.
Impact on essential expenditure
When a province spends such a large proportion of its tax revenue on free schemes, not only capital expenditure on infrastructure would go down, due to increasing debt of the state governments, social services like education and health as well as transport and other essential services will also be impacted. For the development of any state, it is imperative to increase investment in infrastructure. Lack of infrastructure affects investment and hence the development of the state. Therefore, it is necessary to speed up the development of the country by curbing the free schemes offered by the states.
Impact on ratings too
We have to understand that India is a union of states, hence the debts of both the Central Government and the State Government together is considered as the overall debt of the government. While on the one hand the central government has succeeded in reducing its debt which had crossed 60 percent of the gross domestic product during the Covid19, to 55.5 percent in 2022; the debt of various state governments has continuously been increasing in proportion to the state GDP. In such a situation, due to increasing debt on the overall government, the economic rating of the country is getting impacted. If this continues, our country will not only have difficulty in getting new investments, our companies and government will also have to pay higher rate of interest on the borrowing from foreign countries. That is, increasing debt is not only creating fiscal imbalance, but is also affecting the ability of state governments to run welfare schemes and is also blocking the path for the development of the country and industry in particular. There is an urgent need to take appropriate steps to ensure that political parties do not put the country in trouble for their narrow political gains. Due to political reasons, the legislature and government machinery are less likely to be interested in this task, but other pillars of our democracy like judiciary and media will have to come forward in opposing freebies.
(The author is Professor, Department of Economics, P.G.D.A.V. College (University of Delhi)
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