‘States doling out competitive subsidies on brink of fiscal collapse’

Punjab ranks 2nd in terms of subsidies given as a percentage of GSDP

MUMBAI: Warning states against their competitive subsidies, research agency India Ratings (Ind-Ra) has said five states, led by Punjab, are on the brink of a deep fiscal crisis as their subsidies are much higher than sustainable levels in terms of a percentage of GSDP.

The other top states with a very high level of subsidy burdens are Chhattisgarh, Rajasthan, Karnataka and Bihar between FY19 and FY22. IndRa admits that subsidies by definition are not bad or unwarranted. For example, the subsidy given to basic education has significant positive externalities and is merit-based. But most subsidies are non-merit subsidies, which are not desirable.

What is worrisome is that most states, which also include Delhi, tend to fund subsidies, which are mostly non-merit ones, by compressing the capex, due to competitive politics, Devendra Pant, chief economist and head of public finance at the agency, said. The growing culture of doling out subsidies ahead of elections has lately been a topic of public discussion, with NK Singh, chairman of the 15th Finance Commission, publicly speaking against it, highlighting the fiscal unsustainability of these freebies.

Punjab ranks second in terms of subsidies given as a percentage of GSDP and eighth in terms of absolute subsidy given during FY19-22 and is also one of the most heavily indebted states with a debt/GSDP ratio of 53.3 per cent in FY22.

With the fiscal deficit budgeted at Rs 24,240 crore, which is 4.6 per cent of GSDP, interest burden at Rs 20,320 crore or 3.8 per cent of GSDP, and outstanding liabilities at Rs 2.83 lakh crore, Punjab can ill afford more subsid.

However, the AAP government that came to power last month has made several promises, including free power to every household up to 300 units, Rs 1,000 monthly cash doles to every woman and free medical treatment via Mohalla clinics. All this has Punjab staring at an even larger subsidy bill.

Ind-Ra expects the free power offer alone will more than double the power subsidy bill, which in FY22 stood at Rs 10,621 crore.