High subsidies to worsen finances of Punjab, Rajasthan

With non-merit subsidies on the rise to lure 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 GSDP ratio stood at 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 subsidy, given as percentage of GSDP, and eighth in terms of absolute subsidy given during FY19-FY22 is one of the most heavily indebted states of 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 at Rs 203.2 billion (3.8% of GSDP) and outstanding liability at Rs 2.83 trillion, Punjab can ill afford more subsidy. However, with new government in power which had made a number of promises including free power to every household up to 300 units, Rs 1,000 per month to every adult woman and free medical treatment via Mohalla clinics, Punjab is staring at an even larger subsidy bill .

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

Although Rajasthan did not witness assembly elections this year, its subsidy amount is budgeted at Rs 188.5 billion for FY22 with 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 at Rs 4.77 trillion (39.8% of GSDP).

The situation in many other states is equally precarious, despite them not figuring 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), interest burden at Rs 435.3 billion (2.3% of GSDP) and outstanding liability at Rs 6.53 trillion (34.2% of GSDP) in FY22, is now staring at the impact of the poll promises the new government made in the FY23 budget which include free electricity for irrigation and two free cylinders to Ujjwala Yojana beneficiaries for Holi and Diwali every year, the rating agency said.

It may, however, be worth noting that the focus of freebies / subsidies has also undergone a change over the years. While farm loan waiver was at the center stage of state elections during FY15-FY17, free power has been at the center stage in the recently concluded state elections. Another point worth noting is that the farm loan waivers announced in the past did not hit the state government finances abruptly as it was paid in a staggered manner. Another way of analyzing the subsidy is to normalize it in terms of per capita. Here also, Chhattisgarh, Punjab and Karnataka remain in the top five, but Rajasthan and Bihar get replaced by Tamil Nadu and Haryana, it said.


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