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Debt burden on states

Data from RBI shows that the propensity of political parties to make lofty poll promises leads to increase in debt burden on states – Himachal Pradesh and Punjab are two cases in point

The Himachal Pradesh government is planning to cut down on power subsidy. The Punjab government has recently hiked tax on fuel to mop more revenue. Both these states are run by political parties, which came to power on the back of promises of freebies during elections. Both these government are now facing a severe financial crisis. Himachal Pradesh’s fiscal troubles have significant implications for governance and development. To address the budget crisis, the government has been forced to defer salaries for the Chief Minister, ministers, and other officials. About 72% of the state’s revenue is consumed by salaries, pensions, and debt repayments, leaving a mere 28% for development projects. In Punjab, the government recently hiked value-added tax (VAT) on petrol and diesel to boost state’s revenue. The recent hike in VAT on fuel is the third under Chief Minister Bhagwant Mann-led government in the past two-and-a-half years.

What is happening in Himachal and Punjab today will eventually happen to all states where political parties make lofty promises of freebies and struggle to fulfil them when voted to power. The subsidy bills of states are increasing due to the promises made during elections – power subsidy, free travel to women in roadways buses, loan waiver to farmers, monthly payment to women without any work, free laptops, scooty and allowance to unemployed youth. This leads to increase in states’ debt – Himachal Pradesh’s debt is soaring past ₹90,000 crore. The burden to fulfil promises of freebies adversely affects infrastructure repairs and development works, leading to shortfall in job creation. Experts believe that states which fail to invest on the basic facilities such as infrastructure will keep lagging on the development scale and the future generations there will suffer a lot because of this backwardness. Lack of funds in these states will affect urban development, innovations on health care, infrastructure development etc. Of course, freebies are only one part of the problem – the states’ revenue challenges are compounded by several factors such as discontinuation of GST compensation after 2022, cut in states’ borrowing limit etc. 

The financial situation is expected to worsen significantly in the coming years. According to the projections from the 16th Finance Commission, Himachal Pradesh alone will need ₹12,361 crore in the financial year 2026-27 for loan installments and interest. This liability is projected to increase to ₹14,942 crore by 2030-31. The total five-year liability is expected to reach ₹70,718 crore, including ₹26,101 crore in loan installments and ₹44,617 crore in interest. 

Experts also blame COVID-19 pandemic for poor financial health of most Indian states. The crisis in Himachal Pradesh and Punjab is related to cash management crisis. There’s a limit of borrowing due to the Fiscal Responsibility and Budget Management (FRBM) Act. Centre decides state’s borrowing limits. States then fail to fill the revenue deficit by borrowing and are forced to cut on their expenditure. Even states such as Gujarat, Tamil Nadu and Maharashtra, which are big contributors to the country’s GDP, also give subsidy and their financial health is also getting affected but they don’t face any problem in meeting their revenue expenditure because of the size of their budget, industrial development, export and leadership in service sector. Reserve Bank of India has, time and again, raised concern on the rising subsidy bill of states. In fiscal 2018-19, all states and UTs spent ₹187,432 crore on subsidies. In 2023-24 (budget estimates), this rose to ₹419,418 crore. Due to the burgeoning subsidy expenditure, states are failing to increase their capital expenditure, which essentially is spending on basic facilities and development. This is coupled with increase in revenue expenditure – spending on salaries, pensions and loan repayment. RBI data suggests that the revenue expenditure of states in financial year 2019-20 was 13.7% of the gross state domestic product (GSDP), and this has increased to 14.3% in 2023-24. 

In the budget for 2023-24 fiscal, states such as Andhra Pradesh, Himachal Pradesh, Kerala, Punjab, West Bengal, Nagaland and Uttarakhand had revenue deficit, which, in simple words, means that these states were unable to meet their revenue expenditure with revenue receipts. Sometimes funds provided by the Centre are used primarily to cover salary liabilities rather than development projects. This then leads to these states to take loans, and thus increasing the debt burden on them. The 15th Finance Commission had recommended in 2021-22 a Central grant of ₹295,000 crore to 17 states to adjust the revenue deficit. The Centre gave ₹51,673 crore to states for this purpose but due to subsidy and freebies, almost 82% of expenditure of states is on revenue expenditure. In Punjab, 90% of their subsidy bill is for power subsidy. Data shows that in 2023-24, 53% of revenue of states was spent on salaries, pensions, subsidies and loan repayment. But that’s the average figure; in states such as Himachal Pradesh and Punjab, this has been much more – Punjab spent 75% of their receipts and Himachal Pradesh, 80% of their receipts on these heads, leaving very little room for expenditure on other works. 

The situation in Himachal Pradesh and Punjab should act as an alarm bell for other states which don’t think twice before loosening their purse strings on freebies and push the state further into the debt trap. This is not a healthy trend and needs to be changed – the sooner, the better. 

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