HYDERABAD: Telangana is one among the top five states in the country, which witnessed the ‘largest rise’ in subsidies in the last three years. The Reserve Bank of India (RBI) in its June, 2022 bulletin, said: “Kerala, Odisha, Telangana and Uttar Pradesh are the top five states with the largest rise in subsidies over the last three years i.e., 2019-20 to 2021-22. States like Gujarat, Punjab and Chhattisgarh spend more than 10 per cent of their revenue expenditure on subsidies”.
The average year-on-year growth in subsidy expenditure from 2019-20 to 2021-22 in Telangana is around 20 per cent. Besides, according to RBI report, Telangana’s percentage of interest payment to revenue receipts in 2021-22 (RE) is 11.3. The Gross Fiscal Deficit is 3.9 per cent, Revenue deficit is minus 0.4 and primary deficit is 2.4 per cent in 2021-22 (RE).
The RBI report further said: “Subsidies, however, are known to crowd out resources from other useful purposes. In the recent period, State governments have started delivering a portion of their subsidies in the form of freebies. While there is no precise definition of freebies, it is necessary to distinguish them from public/merit goods, expenditure on which brings economic benefits, such as the Public Distribution System, employment guarantee schemes, states’ support for education and health.
The report said, on the other hand, provision of free electricity, free water, free public transportation, waiver of pending utility bills and farm loan waivers are often regarded as freebies, which potentially undermine credit culture, distort prices through cross-subsidisation eroding incentives for private investment, and disincentivise work at the current wage rate leading to a drop in labour force participation. The debt to GSDP percentage of Telangana is 25.2 per cent in 2020-21 and it is 24.7 in 2021-22 (RE) and it is 25.3 per cent in 2022-23 (BE).
Do freebies really help?
Some freebies may benefit the poor if properly targeted with minimal leakages, but their advantages must be evaluated against the large fiscal costs and inefficiencies they cause by distorting prices and misallocating resources. Additionally, the provisions of free electricity and water are known to accelerate environmental degradation and depletion of water tables, the RBI report said.