WHO will bell the cat? This is the query and the chorus within the highest echelons of the forms because it seems at dire state financial knowledge and plans on how to answer the Supreme Court’s prod for solutions within the wake of the Prime Minister’s flagging the politics of freebies (revadi).
The Indian Express spoke to key officers within the Union Ministry of Finance; state Finance Ministers; Election Commission of India, Fifteenth Finance Commission, Niti Aayog, the Reserve Bank of India, and the Comptroller and Auditor General and located a consensus on three key points.
One, each the Centre and the states have been liberal with handouts — help to poor by a state is known as a freebie by Centre, and vice versa. Two, present legal guidelines and mandates don’t permit ECI, CAG, Niti Aayog, and the Finance Commission to step in.
And, three, the Centre is cautious that any unilateral curbs on states will permit political leaders there in charge Prime Minister Narendra Modi for not letting them “do good” for the folks.
Subscriber Only Stories
ECI officers mentioned it could be an “overreach” of legal guidelines governing the ballot physique to control selections of profitable political events. For the Finance Commission whose fundamental duty is to resolve on sharing of sources between the Centre and states, its phrases of reference will want a substantive enlargement. This can be seen as impinging on the federal construction of the polity. RBI’s dominant focus in addition to its mandate is controlling inflation, and Niti Aayog is extra of a suppose tank now.
“Under Article 293 of the Constitution, states need to take the Centre’s consent for fresh loans if they are indebted to the Centre. This is a powerful tool in the hands of the Centre or the Union Finance Ministry. But using it will expose the ruling party in the Centre to the risk of being branded anti-poor by state leaders,” mentioned a former Union Finance Secretary, explaining the Centre’s dilemma.
“The biggest of all freebies is electricity – free power to huge sections of the society is crippling the states,” mentioned a senior Central official. As on May 31, 2022, at a consolidated degree, dues of state distribution firms to producing firms is Rs 1.01 lakh crore; that of the state authorities to distribution firms is Rs 62,931 crore; and the subsidy receivable by the distribution firm from the state is Rs 76,337 crore.
A number of freebies by states right here and there’s by no means an issue – however too many handouts on high of electrical energy subsidies preclude or displace different productive spending.
“This is problematic because certain states are left with little to spend… For example, 86 per cent of Punjab’s expenditure is committed, accounting for payments towards salaries, pensions and interest on past borrowings. Its capital outlay (spending for creating productive assets like roads, schools, hospitals, etc) is just 7.5 per cent,” mentioned an official.
Some states, nonetheless, view the Prime Minister’s views on freebies as extra political relatively than financial. Acknowledging that reckless handouts might result in issues, Tamil Nadu Finance Minister Palanivel Thiaga Rajan advised The Indian Express: “It was Prime Minister Modi himself who in February 2018 launched the scheme giving Rs 25,000 to working women, covering 50 per cent of a two-wheeler cost. Is this not a revadi? Does it not reek of hypocrisy?” The scheme launched by the ADMK authorities in Tamil Nadu was, by the way, scrapped by MK Stalin-led DMK authorities in August 2021.
The Centre’s issues over state funds aren’t unfounded. In a gathering with Chief Secretaries of varied states in June this yr, Union Finance Secretary TV Somanathan is known to have raised a pink flag over enormous borrowing by some states by mortgaging belongings – even Collectors’ workplaces and district court docket premises, and escrowing future revenues (giving the primary cost on income receipts in direction of debt raised).
Similarly, very excessive off-budget borrowings, extreme ensures and contingent liabilities of some states in direction of funding populist schemes have deepened concern on the Centre.
Some economists push again. “When the rich really rip off the banking system, with huge NPAs and write-offs, and a rent-seeking bureaucratic culture, can we say the poor are too pampered with these freebies?” mentioned Maitreesh Ghatak of the London School of Economics. “In behavioural economics, we call it the ‘endowment effect’. It is impossible to do away with benefits once given, it always results in loss aversion. Hence, the concern is a real one. Nothing is free, someone pays for it – taxpayers,” he mentioned.
According to knowledge shared with states by the Union Finance Ministry, between 2019-20 and 2021-22, Andhra Pradesh borrowed Rs 23,899 crore, Uttar Pradesh Rs 17,750 crore, Punjab Rs 2,879 crore and Madhya Pradesh Rs 2,698 crore, by mortgaging belongings and escrowing future revenues.
With limits positioned on market borrowing (3.5 per cent on GSDP), states have resorted to off-budget borrowings. State PSUs or different companies increase debt, and this doesn’t mirror within the books of the state. In the interval 2019-20 to 2021-22, the highest 5 states when it comes to off-budget borrowings have been: Telangana Rs 56,767 crore, Andhra Pradesh Rs 28,837 crore, Uttar Pradesh Rs 24,891 crore, Kerala Rs 10,130 crore and Karnataka Rs 9,981 crore.
Similarly, ensures and contingent liabilities of states have additionally jumped. For Telangana, it stands at about Rs 1.35 lakh crore (11 per cent of GSDP), Andhra Pradesh Rs 1.24 lakh crore (10 per cent of GSDP), Uttar Pradesh Rs 1.73 lakh crore (eight per cent of GSDP) and Rajasthan Rs 90,000 crore (7 per cent of GSDP). The Centre’s ensures, in distinction, are lower than 0.5 per cent of GDP.
“Some states are in a perilous position,” mentioned Fifteenth Finance Commission Chairman NK Singh. “They are entering a fiscal trap, and will find it difficult to meet their debt obligations. Macroeconomic stability is a hard-won battle of this government. But unbridled populism – a new phenomenon – puts such stability at risk.”
While fiscal conservatives, together with these within the authorities, don’t distinguish between Aam Aadmi Party’s electrical energy subsidy to the poor and PM Kisan (Rs 6,000 a yr to each farmer), Singh mentioned there’s a want to tell apart advantage subsidies from freebies. “Support to education and farms are meritorious subsidies and have larger externalities. Free electricity is environmentally unfriendly, and distorts cropping patterns,” he mentioned.
Even Ghatak admits the necessity for a rethink. “(The PM) won 2019 despite economic headwinds, and then there are the recent UP election results. So, when the PM talks about freebies/ ‘revadi’ culture, there is some truth to it but he can afford to say that, like the need for sportsmanship coming from the winning team’s captain. But there is a chance of shifting equilibrium on this and from that point of view, his argument should be taken seriously.”