Election freebies affect debt levels of states, capital expenditure is likely to suffer: Expert

The Karnataka election confirms that three kinds of poll promises are going to flow freely in the coming state elections — and even the national election next year — 1) A basic income for every household,  call it for women or call it Kisan Samman Nidhi, 2) Free electricity, and 3) Free foodgrain..

But can the state finances absorb such huge expenses? Last year, state fiscal deficits only stood at 2.6 percent of GDP, and most states didn't reach the 3 percent limit allowed to them, but this doesn't take into account unpaid dues to power discoms.

Another surprising facet we need to remember is, when it comes to debt and deficit, the centre appears to be the bigger culprit. Here's some data from the government's status paper on debt. It shows that the central government's accumulated debt is 59.2 percent of GDP as of FY21, while the aggregate of all state government debt is less than half that at 28.6 percent of GDP.

Again nearly 42 percent of the centre's revenue receipts goes to pay interest; where as interest accounts for only 14 percent of state government's revenue receipts.

So clearly, the central government, more than states, is guilty of living or promising beyond its means. Does it get far worse? What can be the consequences for the financial sector and the economy? And how can it be arrested?

Speaking to CNBC-TV18, Ajay Narayan Jha, former member of 15th Finance Commission, said that debt levels of states are being stretched and capital expenditure is likely to suffer.

"There is a fiscal cap on the borrowing that states undertake and that will limit the extent of debt which they can take. However what we had observed is that the debt levels of even a state like Karnataka which has been the flagbearer of fiscal responsibility over the last two decades or so, has been stretched and their interest liabilities have gone up. What is worrying at a state level is that if this type of subsidies or freebies or whatever name you give to them, becomes a template as we go into the future, then the capital expenditure which the states undertake is likely to suffer. So that will have long term consequences," Jha said.

According to Jha another cause for concern is the high cost of committed expenditure of states.

"Another cause for concern is the high cost of committed expenditure of states. Out of 28 states, only 11 have committed expenditure to own revenue receipts ratio of less than 100. Out of the 11, only three are below 50 — Karnataka, Maharashtra, and Goa. So as we go forward, this type of indulgence of fiscal adventurism is going to have consequences which we witnessed in late 90s when the fiscal position of the states had become very bad," Jha said.