There is either good politics or bad politics. Good politics invests in public good to lay foundation for expansion of socio-economic pool and base. Bad politics works overtime to find ways to lure voters to win elections. Kutch, Saurashtra and some other parts of Gujarat were parched. Farmers struggled to raise even one crop. Good politics worked for a long-term solution, laid canals, lifted waters from dams to gush into pipelines, and in the course of 15 years, farmers began raising three crops.
Those good politics seen in Gujarat richly rewarded the ruling BJP. The asset creation for solving long-term challenges was funded by the state government through its revenue, which entailed additional revenue flow, and thus helped the farmer stay away from taking debt.
Bad politics too has electoral success to its credit, but its quality is nowhere as resounding as that of Gujarat. Worrisome, though, is the fact that some of the states are splurging on freebies such as free electricity to a large section of population at the cost of education, healthcare and police modernisation. The Gross State Domestic Product of Delhi has been rising since 2015.
The fiscal surplus of NCT of Delhi was Rs 1,332 crore in 2015-16. That turned into deficit during 2016-17 at Rs 1,051 crore, and Rs 416 crore in 2019-20. This is on the back of revenue receipts not matching GSDP due to chronic freebies. Debt capital receipt increased by 65.45 per cent from Rs 2,880 crore in 2018-19 to Rs 4,765 crore in 2019-20 for Delhi due to increased flow of loans and advances from the Central government. The money was used for freebies, as expenditure on subsidies increased from Rs 1,867.61 crore in 2015-16 to Rs 3,592.94 crore in 2019-20.
In Delhi, the transport corporation hasn’t added buses to its strength, while vacancies for teachers and doctors persist. In Delhi, the power tariff revision shows that the individuals are being cross-subsidised at the expense of non-individual consumers. West Bengal has been piling up short-term debts since 2016-17. The state borrowed Rs 23,696.79 crore in 2015-16. This debt climbed to Rs 34,430.52 crore in 2016-17; Rs 36,911 crore in 2017-18; Rs 42,828 crore in 2018-19; and Rs 56,992 crore in 2019. The Trinamool Congress government is just adding the debt burden to run the freebies show.
Similar is the story of Andhra Pradesh. The Uttar Pradesh Government, too, on an average, spent 93.39 per cent of revenue as capital expenditure, while the Rajasthan government spent only 60 percent as capital expenditure from 2018-19 to 2021-22. The capital expenditure would indeed help the state gain more revenues, while also ensuring that the people benefit from the positive spinoffs.
It’s in this backdrop that the Reserve Bank of India, in its report, has cautioned the states, and Prime Minister Narendra Modi has brought the debate at the centre stage of the public discourse. The issue of the politics of freebies is not limited to the whims and fancies of any political party, for India’s march to becoming the third-largest economy by 2035 cannot be derailed by anyone. It is worthwhile to explore the feasibility to establish a Credit Rating Commission. The ratings of the states should be basis for availing loans, with transparency on ‘Return on Investments (RoI)’.
The Commission shall be an independent body comprising officials from the finance ministry, Comptroller and Auditor General (CAG), Reserve Bank of India, Chief Economic Advisor, NITI Aayog, Economic Advisory Council to the Prime Minister and Public Accounts Committee. Parliament can also hold extensive discussions to evolve the blueprint for financial discipline, as the Fiscal Responsibility and Budgetary Management Act has proved inadequate to the task. The post-pandemic world has become more chaotic following the Russian invasion of Ukraine. States must watch out for their finance, as black swan events, if any, could leave catastrophic consequences.
Equally important to note is the shift in the global order and the consequent disruption in the supply chains would bring opportunities, which India can grab and not let them go to the East Asian countries only if the states begin spending money on asset creations and not for luring the voters. Indian economy has to take a quantum leap for the next two decades, and that would require extensive scaling up of public investment to attain $30 trillion scale by 2050.
Sumeet Bhasin
Twitter: @sumeetbhasin
Director, Public Policy Research Centre