Why Indian states are going Bankrupt like Sri Lanka?

 

On 11^th of June 2022, the RBI released a very important document about the finances of the states of India. And you know what some of our Indian states have been managing their finances so bad that these states could be heading towards the same state as Sri Lanka’s economy. And we all know what’s happening with Sri Lanka right now.

The worst part is that if this continues for a long time, the entire country of India will lose money and could face another economic crisis.

 The question is why is RBI document combining Indian states to the economic crisis in Sri Lanka? How are these states making the same mistakes as the Sri Lankan Government?

To start from the basics, if you look at Sri Lankan economy, the country is witnessing an economic crisis because of 3 reasons:

1.       They spent 27 years into fighting a civil war that emptied their coffers and repelled foreign investments.

2.       They did not diversify their exports and were heavily relying on plantation and tourism.

3.       They took a lot of debt and channelized it towards economically unviable welfare schemes. Eventually their debt to GDP ratio went for a toss to 110% and now the country is in a pathetic state.

 For states, there is a metric called debt to GSDP ratio which is used to know the financial health of a state. This is nothing but the ratio of the debt of the state versus the gross state domestic product or GDP of the state. This ratio is ideally supposed to be around 20% but you know what guys while states like Maharashtra, Odisha, Gujarat stand at less than 20% and Punjab, Bihar, Rajasthan, Kerala and Uttar Pradesh have the worst debt % with Punjab and Rajasthan standing at a disastrous 53.3% and 39.5% respectively. And what’s even worse is that Punjab spent 21.3% of its revenue in just interest payments.

Now the question is why are these metrics so bad and what are these low performing states doing that is actually pilling them down?

Well, just like Sri Lanka even these states are ruling out unviable subsidies and freebies for either getting votes to simply please the people. The worse part is that if they are in power, they could easily use the state budget instead of the party funds to please the people.

According to the RBI document, the RBI had raised concerns about 3 such policies:

1.       The 1^st concern is with the pension expenditures.

2.       The losses incurred by the Government-owned power distribution companies or discounts.

3.       Unviable subsidies and unnecessary freebies.

For example: in Punjab, the Government is offering free electricity up to 300 units to every household and is even waving off electricity bills which is said to cause the government 5000 crores. On top of that if the Government does what Mr. Kejriwal promised which is to give 1000 rupees per month per women who is above the age of 18, it said to cause the state 15,000 crores according to RBI. Then we have the Andhra Pradesh Government which is offering 15,000 rupees as financial aid to every poor mother who sends her children to school and this cause the Government more than 6500 crores. All together according to RBI the Andhra Pradesh Government is set to spend 27,541 crores on welfare resume and in Uttar Pradesh the home minister himself had been promising free gas cylinders if people voted for BJP. In Madhya Pradesh, the electricity subsidy to farmers and domestic users alone is said to cause the state 21,000 crores. Just like these, there are list of schemes listed by the RBI for Kerala, Jharkhand, west Bengal, Haryana, Bihar and Madhya Pradesh.

The fact is that this entire list of state covers not just the Aam Aadmi party and congress ruling states but also BJP, YSR congress party, Trinamool congress party and even the CPA. So, this isn’t about which party is doing well and which party is not. It’s overall the economics of the states taking a back seat while politics takes the center stage.

 This is very dangerous. Out of all these schemes, subsidies and freebies, it’s still not able to very clear as to how many of them are said to generate a tangible return for the economy of the states. But the one thing that is for sure is that the people who are benefitting from these schemes are extremely happy and, on the outset, it looks as if the Government is extremely generous and empathetic to the people. But behind the scenes what scares RBI is that these states are taking more and more grants from the state while they are recklessly spending them on people pleasing policies and welfarism and if this continues for a longtime the cost of today’s subsidy will be borne by the same people with inflation, rationing, food and fuel shortages in the future.

BY-              

Tulikadevi  

(30-079)