In elections-after-elections to state assemblies, it has become normal practice for political parties of all hues to promise waiver of farm loans in a bid to swing votes in their favor. They even succeed in forming government.
Last year, in Uttar Pradesh [UP], loan waiver to all small and marginal farmers promised by BJP was a major factor in catapulting it to power in the state. But, it cost the state exchequer around Rs 36,000 crores.
In Punjab, Congress won elections on the promise of waiving all outstanding farmers bleeding the state by thousands of crore. Recently, in Karnataka, the coalition government led by JD [Secular] leader, HD Kumaraswamy has announced a loan waiver [albeit partial] costing the state about Rs 40,000 crore.
The universe of give-away extends much beyond farm loan waiver to cover free education, Wi-Fi, laptop, computer, bicycle, electricity and gas connection etc. Now, with an eye on upcoming elections in three major states viz. Madhya Pradesh, Rajasthan and Chhattisgarh and general elections next year, Congress is contemplating ‘unemployment allowance’ which could be the mother of all give-away.
The parties could not be unaware of the financial implications of these largesse as the states are wedded to the Fiscal Responsibility and Budget Management [FRBM] Act. Under FRBM, they are required to maintain the fiscal deficit [excess of total expenditure over total receipts] as a percentage of state gross domestic product [SGDP] within 3%. But, the liabilities created by poll promises come in the way of achieving the target. The proof of pudding is in eating.
According to a review by the Reserve Bank of India [RBI] on “State Finances: A Study of Budgets”, the state governments had done reasonably well in regard to achieving fiscal target for a few years till 2011-12 when their combined deficit stood at 1.93% of GDP. Thereafter, there has been consistent deterioration with the deficit increasing to 2.6% in 2014-15, 3.1% during 2015-16 and further to a high of 3.5% in 2016-17.
The steep jump in deficit during 2015-16/16-17 was due to the largesse extended by states to farmers and households vide state electricity boards [SEBs]/power distribution companies [PDCs]. Under populist schemes, the latter are made to supply power to former at subsidized rate [free in some states] which results in their incurring losses. These losses are funded by borrowing resulting in accumulation of huge debt which scaled to Rs 400,000 crores as in September, 2015.
Under a scheme UDAY [Ujwal DISCOM Assurance Yojna] brokered by the centre, state governments took over 75% of this debt. The liabilities arising from this takeover made a big dent on the state budgets.
During 2017-18 when the burden of UDAY eased somewhat, the states decided to bring down their combined deficit to 2.7% well below the 3% threshold under the FRBM. But, the actual for 29 states as per revised estimates [RE] was 3.1%. The states’ combined revenue deficit [excess of revenue expenditure over revenue receipt] also turned out to be higher at 0.4% as against the target of ‘zero’.
The slippage despite assured growth in tax revenue under GST dispensation [under it, the centre is obliged to fully compensate states for any shortfall vis-a-vis 14% growth over the base year 2016-17] was caused primarily by the liabilities arising from farm loan waiver besides the impact of revisions in pay/salaries consequent to the 7th Pay Commission recommendations.
For 2018-19, states are aiming at consolidated gross fiscal deficit of 2.6% of GDP – as per the budget estimates [BE] which is even lower than the BE of 2017-18. The target for revenue deficit during 2018-19 is even more ambitious at [minus] 0.2%. But, the continuing populism which will be practiced with greater alacrity in the build up to impending elections later this year will cause a huge increase in revenue expenditure and result in bigger slippage.
The stabilization of GST – much earlier than initially thought – has emboldened the prospects of substantially increasing the tax collections. The centre hopes to garner at least Rs 100,000 crore a month during the current year up from an average collection of Rs 90,000 crore last year [July 2017-March 2018]. This should give a boost to the revenue of states thereby helping them absorb the shock of higher revenue expenditure – triggered by poll related largesse.
But, the moot point to ponder is whether it would be prudent to fritter away the gains from structural reforms such as GST in distributing doles if only to win elections. Why should we not think in terms of using the proceeds from better tax collections for capital expenditure on infrastructure projects such as road, highways, rails, irrigation, waterways, airways, schools, colleges, hospitals etc?
There is a message for the Centre as well. After remaining steadfast on its fiscal consolidation path for 3 years in a row, during 2017-18, it went soft. As against the fiscal deficit target of 3.2%, the actual was 3.5% as per the revised estimate. However, the actual turned out to be still higher at 3.53%. For 2018-19, it has been budgeted at 3.3% as against 3% – it should have been as per an earlier FRBM plan. The 3% norm is now slated to be achieved only in 2019-20.
Modi – government has vowed not to take recourse to profligacy notwithstanding the impending general elections. But, this is not borne out by actions. For instance, the promise of minimum support price [MSP] at 1.5 times the cost for 14 crops alone will dent the budget by about Rs 35,000 crore. The fiscal situation could be catastrophic if next year, a Congress-led government comes to power and redeems its bizarre promise of ‘unemployment allowance’ besides continuing with other sops such as loan waiver, free power etc.
Be it the states or centre, they should take a pledge to shun the current brazen practice of giving sops or else, the country will be plunged into a fiscal disaster and resultant slowdown in growth, steep rise in inflation and aggravated miseries for the poor.