Of the states set for elections in November, Rajasthan already shows signs of fiscal vulnerability.
Five Indian states are headed for elections in November: Mizoram (Nov. 7); Chhattisgarh (Nov. 7 and Nov. 17); Madhya Pradesh (Nov. 17); Rajasthan (Nov. 23); and Telangana (Nov. 30). Counting in all five states will be held on Dec. 3.
Earlier this year, elections were held in Karnataka, where the Congress party, after having come to power, struggled to make good on its election promises because of the unsustainable and high cost to the state exchequer. Of the major states now set for elections, there are substantial inter-state variations in state finances.
Telangana and Chhattisgarh had the lowest fiscal deficit and outstanding liabilities as a share of the state GDP, based on the revised budget estimates for FY23.
If election-bound states were to be ranked in order of their fiscal health, Telangana would be feature first, followed by Madhya Pradesh and Chhattisgarh, according to Paras Jasrai, senior economic analyst at India Ratings.
Based on the fiscal deficit as a share of the GDP and outstanding liabilities as a share of the GDP, Mizoram and Rajasthan already show fiscal stress.
Both states also exceeded the 3.5% fiscal deficit target.
For 2023-24, the central government has permitted fiscal deficit of up to 3.5% of GSDP for states, of which 0.5% of GSDP will be available only upon carrying out certain power sector reforms.
Chhattisgarh: Rising Debt
In FY24, Rs 7,542 crore is estimated to be spent on debt repayment by the state, according to a research note on the state's budget by PRS. This is a 26% increase over the revised estimates for FY23. This could be due to a significant proportion of debt maturing in this financial year, the note said.
The Rajiv Gandhi Rural Landless Agricultural Labourers Nyay Yojana is also likely to have led to a rise in subsidies, Jasrai said.
OPS: Early Warning Signals
Chhattisgarh, along with Rajasthan, Jharkhand, Punjab and Himachal Pradesh, have announced reversal to the old pension system from the National Pension System. The immediate gain is that they will not have to spend on NPS contribution of the current employees. In future, however, the unfunded OPS is likely to exert severe pressures on their finances, especially with increasing longevity, said a research paper by the central bank. For instance, if the current NPS subscribers stay in government service till 60 years of age, in the next 15-year period—from 2023-37—around 20% of the current NPS subscribers will retire. However, in the succeeding 15-year period—2038-52—60% of the current NPS subscribers (numbering around 30 lakh) will retire.
Consequently, any switchback to a defined benefit pension system by the state governments will impose a huge fiscal burden on their finances during this period, the central bank has cautioned.
Madhya Pradesh: Rising Capex And Committed Spends
Madhya Pradesh was among the few states which had increased its capex outlay even amid the pandemic at a time when most states had squeezed capital spending, Jasrai said.
However, along with capex, committed expenditure of the state too appears to be on a rise. From FY17 to FY22, it increased from 32% of revenue receipts to 42%, according to PRS. Committed expenditure of a state typically includes payment of salaries, pensions, and interest, reducing flexibility for developmental expenditure.
In 2023-24, Madhya Pradesh is estimated to spend Rs 1.07 lakh crore on committed expenditure, which is 48% of its revenue receipts.
For the current fiscal, the state government has already released a supplementary grant this soon after the budget, which is highly unusual, Jasrai said.
Rajasthan: Fiscal Stress
Rajasthan, in its state budget for the ongoing fiscal, announced a slew of social security measures, including legislation offering guaranteed wages or pensions to beneficiaries in rural and urban areas. Despite the criticality of such schemes, the state's fiscal position might not give it the leeway to even carry them out sustainably, Jasrai said.
The Reserve Bank of India has identified Rajasthan as a highly stressed state, exceeding both debt and fiscal deficit targets set by the 15th Finance Commission. Rajasthan is also projected to exceed the debt-GSDP ratio of 35% by 2026–27 and will need significant corrective steps to stabilise debt levels, the central bank said.
Telangana
Telangana fared better this fiscal year, front-loading capex, unlike in the last fiscal. The state saw double-digit growth in capex, along with strong growth in its revenue collections, Jasrai said.
The state's fiscal deficit, pegged at 3.2%, was the lowest of all election-bound states.
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