BackRise in state-level subsidy a cause of worry: India Ratings
Punjab which ranks second in terms of the subsidy given as percentage of GSDP and eighth in terms of absolute subsidy given during FY19-FY22 is one of the most heavily indebted states of India
PremiumEven with tight fiscal position, subsidy levels in several states remain at elevated levels, according to India Ratings and Research (Ind-Ra). An analysis by the agency puts Chhattisgarh, Punjab, Rajasthan, Karnataka and Bihar as the top five states in terms of subsidies as a percentage of GSDP during FY19-FY22.
Punjab which ranks second in terms of the subsidy given as percentage of GSDP (gross state domestic product) and eighth in terms of absolute subsidy given during FY19-FY22 is one of the most heavily indebted states of India. Its debt/GSDP is budgeted at 53.3% in FY22. With the state’s fiscal deficit budgeted at ₹242.4 billion (4.6% of GSDP), interest burden at ₹203.2 billion (3.8% of GSDP) and outstanding liability at ₹2.83 trillion, Punjab can ill afford more subsidy, the ratings agency said.
However, with the new government in power which had made a number of promises including free power to every household up to 300 units, ₹1,000 per month to every adult woman and free medical treatment via mohalla clinics, Punjab is staring at an even larger subsidy bill.
Ind-Ra expects the promise of free power to each household up to 300 units alone to more than double the power subsidy bill (FY22BE: ₹106.21 billion) of Punjab in FY23.
Although Rajasthan did not witness assembly elections this year, its subsidy amount is also budgeted at ₹188.5 billion for FY22 with the fiscal deficit budgeted at ₹476.5 billion (4.0% of GSDP), interest burden at ₹283.6 billion (2.4% of GSDP) and outstanding liability at ₹4.77 trillion (39.8% of GSDP).
The situation in many other states is equally precarious, despite they not figuring in the top five either on the basis of absolute subsidy or subsidy as a percentage of GSDP, Ind-Ra said.
For example, Uttar Pradesh whose fiscal deficit was budgeted at ₹901.3 billion (4.7% of GSDP), interest burden at ₹435.3 billion (2.3% of GSDP) and outstanding liability at ₹6.53 trillion (34.2% of GSDP) in FY22, is now staring at the impact of the poll promises of the new government on the FY23 budget. The promises include free electricity for irrigation and two free cylinders to Ujjwala beneficiaries every year. The two free cylinders alone are expected to cost the UP-state exchequer about ₹28 billion.
However, the appearance of Chhattisgarh, a relatively new state with limited fiscal capacity, in the top five states both in terms of the absolute subsidy and subsidy given as percentage of GSDP is a bit intriguing, the agency’s analysis said. The spurt in subsidy in Chhattisgarh took place in FY20 when it had jumped to ₹203.3 billion from ₹83.2 billion in FY19. One of the reasons for this abrupt jump was the rollout of Rajiv Gandhi Kisan Nyay Yojana under which farmers were given input subsidy by directly transferring the requisite amount into their bank accounts. The other key areas of subsidy were food and civil supplies, free supply of power to agricultural pumps, agricultural loan waiver scheme etc.
Although it is difficult to establish one-to-one correspondence between the subsidy provided by the state and its capex spending, fiscal adjustments have mostly been carried out by compressing the capex.
Ind-Ra did not observe any trend in the capex across the states during FY19-FY22. FY21 and FY22 were difficult years due to the COVID 19 pandemic and states were forced to undertake higher revenue expenditure especially due to higher health care expenses. However, focus returned on capex across states in FY22 and in select cases budgeted capex were in fact over optimistic.
Interestingly, small and northeastern states show a much higher capex as percentage of GSDP than large and well-off states. This could be because of the need to reduce the infrastructure deficit and the higher funds provided by the union government to improve the air, rail, road, waterways, telecom, and power connectivity in the northeastern states.
Well-off states such as Maharashtra, Tamil Nadu, and Karnataka although rank among the top five in terms of average capex spend during FY19-FY22, they stand much lower in terms of capex as a percentage of GSDP.
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