Munificent Spending Sinking States into Debt Trap: Budgets Analysis of more Developed States | Sher Singh Sangwan

Abstract

Generous spending on social security/pensions and freebies like free travel and house-maintenance allowance for women, free electricity and LPG connections are becoming common announcement by all political parties. The support to marginalised sections of the society may be appreciated by all and they may also agree that it should happen from the budget surplus of Governments. In this context, major fiscal parameters of four revenue deficit and one revenue surplus states have been analysed. The study reveals that most of the states are unable to impose new taxes and are resorting to borrowings from market and institutions. These burgeoning expenditures are increasing the revenue deficits and outstanding debt & liabilities of most of the states and the central government. The interest and loan repayments in turn are adversely impacting their capital investment. Hence states should focus on increasing own tax revenue from the haves’ to make the social welfare spending sustainable.

Key Words: Freebies, revenue deficit, debt & liabilities, own-tax revenue, User-charges

Questions are raised against generous spending and freebies by the States and Central Governments for political consideration and relegating the economics to the background. The outstanding debt & liabilities of all States and Union Territories(UTs) as of March 31 2023, are estimated at Rs83.31 lakh crore as per the latest study of state budgets (RBI, Dec. 2023). Besides, the Central Government has an outstanding internal debt of Rs 165.63 lakh crore and 7.71 lakh crore of external debt. As per the revised budgets 2023 (op cit), the debt and liabilities of all States/UTs are about 28 % of their Gross State Domestic Products (GSDPs) for the year 2022-23. Among the big states, those with debt & liabilities less than the average of all States and UTs are Chhattisgarh, Goa, Gujarat, Karnataka, Maharashtra, NCT Delhi, West Bengal and Uttrakhand (eight only). The three states of Telangana, Assam and Madhya Pradesh are around the average. The remaining 20 states of the total 31 of the study (op cit) have debt and liabilities higher than the average 28 % of all states/UTs. Of them, the fiscal data of four states of Haryana, Punjab, Kerala, and Tamil Nadu whose debts are above the India average and one Gujarat below that, are analysed to bring out reasons for higher debt and liabilities. The amounts of debts & liabilities, Revenue Deficits and Fiscal Deficit, along with the percentage of their GSDPs are given in Table 1.

Table 1: Important Fiscal Indicators of Major States (Amount in Rs Crore)

Note: GSDP=Gross State Domestic Product, RE= Revised estimates, BE= Budget estimates
Source: State Finances: A study of Budgets, Dec.2023, RBI. These figures may not tally with that of state Documents.

The Table shows that debt &liabilities as a percentage of GSDP are the lowest at 19 % in Gujarat but the other four states have between 31 to 47 with the highest in Punjab (47%) followed by Kerala (38%) and about 31 % in Haryana & Tamil Nadu. All five states have higher per capita income than the average of all States and UTs. The sample states excluding Gujarat accounted for about 23 % of the debt & liabilities of all states as of March 2023. The genesis of these liabilities is their high revenue deficits (RDs) which account for about 74 % of all States & UTs. The total is less due to reduction by revenue surplus states of Uttar Pradesh, Gujarat, Chhattisgarh, Madhya Pradesh, Jharkhand, Odisha, Telangana, NCT Delhi and special category states. The RDs and borrowings may arise due to emerging high social services and non-development expenses. These are presented for these sample states in Table 2.

Source: State Finances: A study of Budgets Dec11, 2023

Table 2 shows that despite RDs, the expenditure on social services in Haryana and Tamil Nadu is almost equal to 41 % of all India’s while Punjab and Kerala have brought it down in recent years. The social security expenses are almost double that of all India in Haryana, which is a challenge to sustain from the borrowings. It has impacted the allocation of economic services in Kerala & Haryana which is less than India’s average. The non-development expenditure are the highest in Kerala followed by Punjab and Haryana. The main sub-sectors of non-development expenditure are interest payment, police and pensions. Of these, interest payments and police are much higher in Punjab and Haryana compared to southern States and Gujarat. Despite the higher spending on the police administration; their law and order is not reported better than that of Kerala, Tamil Nadu and Gujarat. Owing to the high social security and non-development expenses, Haryana is fast approaching Punjab in the size of RDs and outstanding debt and liabilities (Figure 1)

Figure 1: Trend in the Debt Liabilities of Haryana, Source: Budget at Glance 2024-25

Figure 1 shows that the debt of the Haryana Government has continuously increased from 2014-15 of the present government from Rs70971 crore to Rs 317982 (Harayna, 2024). It has increased by 3.7 times compared to about 3 times in Punjab during this period. The Haryana government feels satisfied that its debt liabilities are just 26 % of its gross state domestic product (GSDP) as against the safe limit of 33 % and 46 % of the neighbouring State. It is to be noted that debt liabilities as % of GSDP were just 16 % in 2014-15, and 22 % in 2018 -19 in Haryana. Thanks to the increase in GSDP of Haryana by about 2.5 times compared to 1.8 times in Punjab during the last 10 years; otherwise, this ratio would have been about 40 % in Haryana too.
The most damaging is the higher revenue deficit (RD) of Haryana which increased from about Rs8000 in 2014-15 to Rs17817 crore in 2024-25, though in terms of percentage to GSDP, it ranged from 1.5 & to 2.5 % due to a higher growth rate of the later. As per the ‘White Paper’ on the State Finances (Haryana, 2015), it was revenue surplus by about Rs2000 crore in 2007-08, thereafter, it has been Revenue Deficit with continuous increase in the amount. The annual enhancement in revenue deficit has kept the fiscal deficit around 3 % of GSDP during the last 10 years which was 2.12 per cent in 2013-14. These have continuously pushed up the debt liabilities of Haryana. Since 2014-15, the state has not made any big capital investment except for loan-restructuring of electricity corporations and an 800 Meghwat thermal plant proposed in 2024-25. Though, in the total budget, capital expenditure is shown as about 30 %, out of that, about 2/3rd is going towards repayment of principal instalments.

The million-dollar question is; whether Haryana and many other states indulged in generous spending by borrowing or increasing their revenue receipts. Being a continuous analyst of Haryana budgets, the state has not dared to impose new taxes; though it is quoted all over India for the highest pensions to elders above 60 years, widows, handicapped and even unmarried male adults above 45 years. The gesture of the Haryana government for these marginalised sections is well appreciated in the state and even quoted in other states. But this largesse by borrowing may not be sustainable by Haryana and others. Even in the latest Haryana budget of 2024-25, the allocations for the repair of Chaupals, setting up sports- nurseries, public libraries, ITIs and providing drones to 700 women SHGs, solarisation of houses of the poor, setting up of Food Park and entrepreneurs’ College, subsidy for solar irrigation pumps are need-based expenditures. But popular announcements for loan waivers, houses in urban& rural areas, airstrips in the places near Delhi and free pilgrimage to religious places are not justified by borrowings. The additional loans for productive purposes like thermal plants, industrial estates and nurseries for vegetables & fruit seedlings may increase state income in future but using the loans for higher expenditure on general administration, higher honorarium/salaries to all public representatives from member Panchayats to all above up to the Member of legislative Assembly may be extravagant. The multiple pensions of Members of the Legislative Assembly are not justifiable and must be stopped like in Punjab because such expenditures are adding to the RDs of states every year (op. cit, RBI).

Conclusions

Given the increasing social security and welfare expenditure in all states, their Governments should mobilise additional taxes from the haves, at least equal to new benefactions. The real strength of state finances is its own tax revenues (SOTR). There is a large spatial variation in SOTR, ranging from more than 70 per cent of total tax revenue in Haryana, Maharashtra, Telangana, Tamil Nadu, Gujarat, Karnataka, Kerala and Punjab to less than 50 per cent in Bihar and Jharkhand (op cit RBI). After five years of goods & service tax implementation, there has been a general increase in the share of SOTR and helped the States. Besides, States should focus on increasing non-tax revenue by periodic revisions of user charges on electricity, water and other public services, royalties and premia from mining and improved financial management of State PSUs. From a longer-term policy perspective, improvement in the fiscal parameters by a state must be given more weightage in devolutions/transfers from the Central government.

References

• Government of Haryana (2024); Budgets at Glance of 2024-25 and earlier years
• -----(2015): White Paper on State Finances Part I and II, Finance Department, March
• RBI (2023): State-Finances: A study of Budgets, December 13, 2023, and Earlier Years
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  (Author: Dr. Sher Singh Sangwan, Former Professor State Bank of India )