The heat of the 2024 Lok Sabha election is at its peak. Every vote is important, and, therefore, political parties are trying to woo every section of society. Earlier, political parties used to make announcements about their proposed policies in their election manifestos. But for the last one and a half to two decades, they have started making announcements for free schemes to woo voters.
It’s beyond doubt that providing free electricity, water, or travel to everyone could ruin government budgets and increase debt too. Today, there is an ongoing competition between political parties about freebies, and in an effort to woo voters and gain power by hook or by crook, many Indian states are already getting burdened with debt. As a result, on the one hand, they are failing to fulfil their promises completely, and on the other, the development work and essential government activities in those states are getting affected.
Many states are affected
During the 2022 assembly election in Punjab, the Aam Aadmi Party (AAP) made many promises, including free electricity. After the formation of the AAP government, some of these were implemented, but today, the situation is such that the debt burden on the government is continuously increasing and the state is trying to take more loans. The central government is also being accused of not giving money to the state, whereas the reality is that the state government is irresponsibly spending on freebies to garner votes. The situation is the same in Andhra Pradesh, Telangana, Rajasthan, West Bengal, Bihar, and Jharkhand.
Meanwhile, the central government is not in favour of states taking more loans because it is against the Fiscal Responsibility and Budget Management (FRBM) Act 2003. The states in debt due to expenditure on freebie schemes are unable to spend on the necessary responsibilities. Industries in Punjab are incurring high electricity bills because the AAP government is giving free electricity to nearly 60 lakh people.
Infrastructure development in the state is getting badly affected too. Punjab, once the state with the highest per capita income in the country, has slipped to the 19th position. Other debt-ridden states are suffering a similar fate.
In its 2024 election manifesto, Congress has announced Rs 1 lakh as an unconditional cash transfer to the poor every year as part of its Mahalaxmi Scheme. If the party comes to power, the implementation of such a scheme can be frightening. It’s notable that as of 31 March 2023, the total debt on the governments (central and state) in India (including the guarantees given by them) was Rs 231.7 lakh crores, which was 85.1 per cent of GDP at current prices. Out of this, the total debt of the central government is equal to 57.1 per cent of the GDP and the rest is of the state governments (nearly 28 per cent of GDP).
According to the FRBM Act, the target debt-GSDP (gross state domestic product) ratio, in any state, should not exceed 20 per cent. But as per the Comptroller and Auditor General of India (CAG), in many of the states of the country, this ratio is much more than the targeted one. It reached 48.98 per cent in Punjab, 42.37 per cent in Rajasthan, 37.39 per cent in West Bengal, 36.73 per cent in Bihar, 35.30 per cent in Andhra Pradesh, 31.53 per cent in Madhya Pradesh, 27.80 per cent in Telangana, 27.27 per cent in Tamil Nadu, and 26.47 per cent in Chhattisgarh in 2020-21. If the debt on state government enterprises and the guarantees given by the state governments are also added, then by 2020-21, the debt to GSDP ratio in Rajasthan would be 54.94 per cent and in Punjab, it would be 58.21 per cent. In Andhra Pradesh also it has been estimated at 53.77 per cent; it is 47.89 per cent in Telangana and 47.13 per cent in Madhya Pradesh. In West Bengal and Bihar, it’s 40.35 per cent and 40.51 per cent, and in Tamil Nadu, 39.94 per cent. It is noteworthy that in Punjab, 45.5 per cent of the total tax revenue is being spent on free schemes and in Andhra Pradesh, expenditure on freebies is 30.3 per cent of total tax revenue. It’s unfortunate that the increase in the overall debt due to irresponsible freebies is causing the downgrade of sovereign ratings by international agencies.
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Fiscal crisis ahead
It has to be understood that whether it is the central or state governments, none has unlimited money to spend. The fiscal space largely depends on the tax-paying capacity of the people of the country. For a long time, our tax-GDP ratio has remained sticky at 17 per cent, out of which the ratio of taxes levied by the central government has remained around 10-11 per cent of the GDP. The total receipt of taxes (net) in the year 2024-25, of central government, has been estimated to be only Rs 26.02 lakh crore.
In such a situation, in the total budget of Rs 47.66 lakh crore, after tax receipts of Rs 26.02 lakh crore and non-tax revenue receipts of Rs 4 lakh crore, the remaining fiscal deficit, which is about Rs 16.85 lakh crore, will be filled from borrowing. That is, there is no other way to spend more. Apart from this, it must also be understood that economists are unanimous on the view that more than 75 per cent of the total budget is spent on predetermined items, which include payment of principal and interest on loans raised in the past, salary and pension, defence expenditure, law and order, international relations, maintenance and other necessary expenses.
After this, what remains is spent on infrastructure, welfare schemes such as housing for the poor, public distribution, MNREGA, drinking water, development programmes for Scheduled Castes/Tribes, women, and children, agricultural and industrial development, welfare of minorities etc.
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Under the Congress
If the Mahalaxmi Scheme proposed by the Congress is implemented, then at least Rs 10-12 lakh crore will have to be made available for the purpose. Some of the possible effects would be as follows.
First, due to limited taxation, capital expenditure will be the first victim. This means that infrastructure, industrial and agricultural development, and other capital expenditure will be cut. If we look into the history, in the 10 years of United Progressive Alliance (UPA) rule, the total capital expenditure increased from Rs 1.09 lakh crore in the year 2003-04 to just Rs 1.88 lakh crore by the year 2013-14, that is, an increase of mere 72 per cent. Whereas during Narendra Modi’s tenure as Prime Minister, it reached Rs 10.01 lakh crore by 2023-24, that is, an increase of 433 per cent. The effect will be that development will come to a halt under the Congress, due to which tax receipts will also decrease in future.
Second, the government will have to borrow hugely, the effect of which will be that the future budget outgo on interest will increase and the future budgets will also be in jeopardy.
Third, deficit budgets will have to be made; the FRBM Act will have to be dumped, causing inflation to increase.
Fourth, welfare programmes like housing for the poor, toilets, and drinking water will also be affected.
Fifth, due to the increase in government debt, poor ratings by international agencies will affect our future foreign investment and interest rates. Our country’s development may further come to a halt.
Take a lesson from Latin America: Countries like Argentina and Venezuela also adopted such freebies schemes. Today, these countries are going through terrible debt, inflation, and economic crisis.
Ashwani Mahajan is a professor at PGDAV College, University of Delhi. He tweets @ashwani_mahajan. Views are personal.
(Edited by Humra Laeeq)