High subsidies to worsen finances in Punjab, Rajasthan

With non-merit subsidies rising to entice voters, Chhattisgarh, Punjab, Rajasthan, Karnataka and Bihar have emerged as the top five states in terms of subsidies as a share of GSDP during FY19-FY22, according to India Ratings.

Chhattisgarh’s subsidy to the GSDP was 5.69, followed by Punjab (2.16), Rajasthan (1.83), Karnataka (1.44) and Bihar (1.41) during the period.

Punjab, which ranks second in terms of subsidies given as a percentage of GSDP, and eighth in terms of absolute subsidies given during FY19-FY22, is one of the most indebted states in India.

Punjab’s debt / GSDP is budgeted at 53.3% in FY22. With the fiscal deficit budgeted at Rs 242.4 billion (4.6% of GSDP), interest burden of Rs 203.2 billion (3.8% of GSDP) and outstanding commitments of Rs 2.83 trillion, Punjab can barely afford more grants. But with a new government in power that had made a number of promises, including free electricity for every household up to 300 units, Rs 1,000 a month for every adult woman and free medical treatment through Mohalla clinics, Punjab is staring at an even bigger subsidy bill .

India Rating expects “the promise of free electricity for each household up to 300 units alone to more than double the electricity subsidy bill (FY22BE: Rs 106.21 billion) in Punjab in FY23.”

Although Rajasthan did not witness the general election this year, its subsidy amount is budgeted at Rs 188.5 billion for FY22 with a fiscal deficit budgeted at Rs 476.5 billion (4.0% of GSDP), interest burden at Rs 283.6 billion ( 2.4% of GSDP) and outstanding liability of Rs 4.77 trillion (39.8% of GSDP).

The situation in many other states is just as precarious, despite not being in the top five on the basis of either absolute subsidy or subsidy as a percentage of GSDP.

For example, Uttar Pradesh, whose fiscal deficit was budgeted at Rs 901.3 billion (4.7% of GSDP), the interest burden at Rs 435.3 billion (2.3% of GSDP) and outstanding debt at Rs 6.53 trillion ( 34.2% of GSDP) in FY22, now staring at the impact of the vote promises the new government made in the FY23 budget, which includes free electricity for irrigation and two free cylinders for Ujjwala Yojana recipients for Holi and Diwali each year, said the rating agency.

However, it may be worth noting that the focus on freebies / grants has also changed over the years. While waiver of agricultural loans was at the center of state elections during FY15-FY17, free power has been at the center of the recently concluded state elections. Another point worth noting is that the previously announced waivers of agricultural loans did not hit the state’s state finances abruptly as they were paid off in a staggered manner. Another way to analyze the subsidy is to normalize it per. inhabitant. Here, too, Chhattisgarh, Punjab and Karnataka remain in the top five, but Rajasthan and Bihar will be replaced by Tamil Nadu and Haryana, it says.

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