Revealing data on Indian states’ profligacy, deficits approaching bankruptcy & a GST-linked problem

foreign [Music] related documents carefully foreign debates in our country at any point of time but if you ask me what are the three of top most importance right now one of those one of those would be the state of India's Fisk that is Fisk at the center at the federal or the central level and also at the states level that is fiscal deficit that is revenue deficit that is what the Prime Minister described as the fact is that nobody is non-guilty in that area barring a rare one if at all so in this one everybody is guilty to almost the same extent it's just that some are a lot more guilty than others so when you get into a debate like this what you need is data data analysis because data is the analysts tool data is also the declutterous tool because I I just can't tell you oh this is like this because I think this is like this I have to find evidence for that you need institutions that produce data government produces some data but increasingly governments are producing less data in India and particularly at the center less and less data is coming out even if it's coming out if it's coming out too late so that's why institutions that produce data are very very important and one of those which has risen in the past decade decade plus is PRS parliamentary research service or PRS this was founded by Mr mother and madhukar marvelous guys and chakshu Roy there hits the legislative and Civic engagement initiatives now PRS does a lot of marvelous Research In fact when I was in the Indian Express we published a whole book with them India's elected that looked at the track record with data of all r543 members of parliament Lok Sabha members so that's the kind of work PRS test now what they've done is they've produced this marvelous discussion paper it said I eye opener this is a discussion paper on state finances the state of our states what's happening to the finances of our states we talked about the finances of the center just maybe a couple of weeks back right we talked about fiscal deficit with we talked about India's debt Etc but what is India India is also India also consists of all these 30 plus States in union territories so all of them add up to this larger Kitty or the larger pie or the larger cake or pizza or Roti whatever you want to call it that is India now what is happening with the finances of India States and that is an eye-opener the data that this research is produced this discussion paper it's a short one I will share it with you you can see it we'll also be using Graphics from it with gratitude to PRS they've done a lot of our homework for us I know you keep complaining that we should do more graphics and our Graphics are probably not good enough we are working on that we are making our graphics better but right now we have these Graphics available so what are these what is the big picture that these Graphics are telling us in this data is telling us this data is telling us something for which I will use the old metaphor of a dog and its tail and if you've been if you've been following my work for a long time you know if I compare anything or anybody with a dog or a cat it's not it's not an insult least of all it is mostly a compliment because we love dogs and cats and a lot of dog and cat metaphors are common usage nobody Minds being called a top dog nobody likes to be an underdog everybody likes to be top dog so like that in Hindi there's a saying you know a dog's tail a dog's tail is usually curled like this imagine a dog that dog's tail is always curled and remains curled and the story is that once somebody said some badshah or Maharaja said I will get this dog straight tail straightened so he ordered for the dog's tail to be put in a straight pipe for 12 viewers and he said now this will stay tuned straightened but 12 years later when the pipe was removed the tail again came back to the original so in Hindi they say okay so that is the metaphor we use to explain addictions habits very durable traits that do not change irrespective of what you do so that addiction for our government whether the center or the states is overspending it's overspending it's living beyond their means so this is for everybody be focused on the center the other day we had talked about the inductedness of our state sub States some time back that was the RBI report that we discussed I think it was episode 1035 I'll share that link also with you now we are looking specifically at the state of the state's budgets if you now remember or check out that episode 1035 which we did in July sometime you will see that we had listed the 10 most indebted states in India based on an RBI report and these 10 most indebted States these are all Usual Suspects in Punjab usually top of the pops although not the kind of top of the pops they want to be in but Punjab most inducted Rajasthan Kerala West Bengal madhya Pradesh uttar pradeshar Andhra Pradesh and jharkhad they were the 10 most indebted States these 10 most indebted States also accounted for half of all the expenditure among Indian States because these also include big states of India upmp West Bengal Rajasthan Etc now in all these states that report had pointed out that just the interest payments just the interest payments on their debt were higher than 10 percent of their total income that was one more symptom of armed foreign there were many states in India which accounted for more than three percent each of India's fiscal deficit right so these were states with shambolic finances we spoke about those and we are not going to repeat that right now we had also then said that many of these states for overspending so much that by the time they paid salaries pensions interest on whatever they had borrowed earlier in subsidies they were left with almost nothing to build anything any assets so again at on the top was Punjab number two Kerala so Punjab Punjab the ratio of their revenue expenditure that is expenditure on salary pensions interest subsidies Etc were 16.6 rupees and non-development building a new road buying a new bus setting up a new hospital was one rupee which means out of a hundred rupees Punjab had just about six rupees left to do anything constructive or to build any assets Kerala was a little bit less worse at a ratio of 12 bits to 1 so they had maybe out of a hundred rupees eight rupees left and many other states were also in a bad situation now before we go deeper into the state's finances we have to understand some Basics because we are not economists most of our most of us are not economists so what is revenue deficit and what is fiscal deficit so Revenue deficit is when your expenditure is more than all that you earn by way of your own taxes and Central grants Etc all of that is your Revenue if you spend more than your Revenue that means you have a revenue deficit and if you are spending all of that money on what is called as Revenue items as I just explained to you salaries pensions interest subsidies all the items generally that do not create an asset then if you are spending more than your revenues on your Revenue items that means you are truly bankrupt and then to do anything in your state it that is even to buy a few few more buses you have to borrow even more money or you have to come to the center to beg for some more under some head or the other that is one what is fiscal deficit so revenue is what a state earns Fisk the fiscal income of a state or the size of the Fisk also depends on other incomes that a State might have for example income income from dividends and share sale Etc or interest from psus it owns that never happens almost never happens in real real life there might be some exceptions here and there but most State Enterprises state-run Enterprises are even more even more loss making than centers psus so that is it that is just a notional thing or you can sell a little bit of land somewhere the state can auction a land or a bus or a bus stand etc etc and that can raise some money all of that adds up and that is the Fisk and then you see if your expenditure is more than your your Fisk that is the fiscal deficit that you have to top up and you top that up by borrowing and that is when your borrowings go up and your interest costs go up and you go deeper and deeper into it trap so now see the state of India States over the past 10 years now if over the past 10 years you want to see the state's outstanding liabilities which means the debts that the States owe to some lender or the other see this graphic this graphic runs almost perfectly like this almost perfectly like this what does it show to you that this these liabilities or this debt was at its highest in 2004-2005 as a percentage of GDP so 2004 2005 that's the year UPA comes in it was 31.3 percent please see the graphic carefully and see the shape of the graphic which means every subsequent year this has come down coming down is a good thing going up it's a bad thing so it keeps coming down lower and lower and lower so from 31.3 it reaches the lowest point of 21.7 what year is that that is 2014-15 right that is the last year of UPA then then comes NDA and then we don't know the reasons yet as soon as the NDA comes in this graph starts Rising so now this is not State specific this is for all the states together so after two thousand 14 the graph begins to rise rise rise rise rise rise until it reaches where it reaches exactly where we began so this is a back to square one graphic that's why I've taken the liberty of putting the headline on this graphic back to square one so two thousand four five thirty one point three came down to 21.7 in 2014-15 something right must have been done some kind of fiscal discipline must have come into the states and then once again all caution has been thrown back thrown to the winds and you're back to 31.2 percent now and chances are that next year it will be even higher so that gives you the larger picture the big picture and what is the target of deficit all governments have debt all governments have deficit so the debt Target for India was set up by what is called as the frbm act now frbm act which is fiscal responsibility and budget management act that would be a bit like that null key or that pipe in which the dog's tail was put in that all right you guys will not learn you will continue to be profligated and spend Thrift so maybe I am giving you a law to put your tail in a pipe so that law was like the pipe in which the tail of our governments was put in our political class was put in frbm act fiscal responsibility and budget management act that says that by 24 25 2020 425 all of India's debt all of India's debt should be within 60 percent of India's GDP right 60 percent India GDP India's GDP if that was the situation would be quite healthy and manageable because governments borrow governments also print some money India could manage that that would be really as close to a perfect world as India could get but realistically so and that is the Target that frbm act had fixed of this 40 percent was to come from the center and 20 percent from the states now leave out leave out the center for right now but see what is happening with the states because you know what happens when your debt goes up and when when your deficit goes up that leads to that leads to distortionary taxes or which I might call extortionary taxes and that also means that your development expense goes down because you don't have any budgets left for development now see what's happened with the states and see the states which are doing really badly in some states which might be exceptions on the good side so if you see this chart again we are taking it from PRS it tells you some Usual Suspects so all right arunachal 57 percent of GDP as that you might say arunachal is a small state a small GDP a border state very little economy very little business very little industry so you can leave it aside and look at the bigger state so bigger States the Champions are Jammu and Kashmir 57 percent was once again you might say Kashmir has ongoing problems it's just been split etcetera etcetera so you can leave that aside so the champion is top of the pops Punjab 53 that is literally a case of amdania which means 53 percent of your GDP is just your debt and that is for a large state in the country highest in the country then there are some other ones Himachal Pradesh 43 percent once again there is a political lesson there that state has run up such a high debt it's not a poor poor State they've run this high debt because they are spending money on populism and in spite of that the BJP government has lost power there so this idea that you just keep throwing money at the voters and voters are so stupid and so greedy that they'll keep voting for you is not correct so 43 percent in Himachal 40 percent in Rajasthan now that's the point that I have made in the past also and I will repeat it because Rajasthan is a state which has among the worst Financial indicators in the country that's despite the fact that Rajasthan gets a sizable amount of revenues as royalty on oil that on crude oil that vedanta pulls out in its onshore oil fields in spite of that Rajasthan is in such a mess in fact traveling through Rajasthan in 2013 during the election elections covering the elections as part of my election series writings of the wall I had written something that said Rajasthan is actually the karambhumi of Sonia nomics that is just full distributive political economy and see the consequences at that time Congress had got wiped out despite all those giveaways at this point those giveaways if anything are even more intense and the bankruptcy also is even more intense now again if you read this report this tells you that between 2015-16 and 2019-20 so this report tells us that eight states of India that eight states of India observed a revenue deficit for all the years between 2015 to 2015-16 and 2019-20 all the years consist instant record right teddychal constantly that is Andhra Pradesh haryana Kerala Punjab Rajasthan Tamil Nadu uttarakhand and West Bengal so in 2022-23 for 2022-23 15 Finance commission came with a recommendation that Center should give a Top-Up Grant of 86 000 crores to some of the states to build bring them out pull them out of this trap these states were Andhra Himachal Kerala Punjab Rajasthan tripura and West Bengal if no such grants were provided and expenditures were kept the same which means no further income came Center gave no no oxygen and the states continue to have the same expenditure then six more States would observe Revenue deficit and these states would be Assam meghalaya mizoram nagaland Sikkim and uttarakhand over the next three years further these grants are to substantially reduce because the center can't keep on producing grants and distributing them to you when that happens five more States will go into Revenue deficit that is haryana Karnataka Maharashtra madhya Pradesh and Tamil Nadu so at this point all of these states either have to increase their revenues or to cut their deficit in fact indications are none of them is doing any such thing and in fact they can possibly get a little more help from the center they can be allowed to borrow a little more money to the extent of 0.5 percent of their gstp that is a state Gross State domestic product but that will be linked to some power reforms and no state government of India is going to Institute any power reform do you want to see the state of your of your power companies the debt built up by our power companies in our States today look at this figure and hold your breath 5.9 lakh crores that is 5.9 trillion rupees in fact even between 2017-18 and 2000 20 21 a debt or a loss of 2. of 2.9 lakh crore has been built up by state governments power distribution companies and what happens is that because these distribution companies are owned by the state governments in some in some states that government is Distributing power directly but even if it's a state government-owned company this is a contingent liability upon the state government the state government is supposed to fund the losses of these companies so 2.9 lakh crores just between 1718 and 2021 the total losses of power companies 5.9 lakh crores there is some incentive if these states reform their power sector but you know what the risks politically are too high once you get your people used to having free Power very few would agree to start paying for it voluntarily or happily or on their own that is where our fiscal discipline has got stuck and that's the reason I say in spite of the frbm ACT is not straightening because that is a compulsion of India's politics unfortunately and that has not become ossified so there is this other chart now which which we are looking at that is the chart of fiscal deficit of the various States for 22-23 as per budget estimates and this is a percentage of gsdp now government of India central government allows three percent three percent is tolerable all right if a state can run up up to three percent of its GDP as deficit but again look at some Champion States okay the highest is Manipur at six point five percent but we will rule Manipur out because it's a small state with a small economy with a lot of trouble etcetera etcetera but there are other state governments which are doing quite badly Himachal Pradesh again five percent you ran up such a deficit and still got defeated so thoroughly in the elections that means either you didn't spend the money well or your voters are too smart just to vote for you because you are giving them freebies look at Punjab 3.8 percent not as bad as I might have expected it to be but still 3.8 percent is higher than the norm madhya Pradesh 4.6 Goa guys a rich State 4.7 percent and Rajasthan as you would expect 4.4 percent so all these states are defying their Norm of a maximum of three percent of GDP as their deficit now we have said a lot of harsh things about the states but the states also might have a complaint and that complaint is ever since GST came in the states share that we get from the center for GST actually is lower than the revenue they used to collect when they had the power to Levy all these taxes all those taxes got subsumed by the center in GST on the promise on the simple promise that look you give the power of leaving all these taxes to us we will Levy these taxes and will give you a layer out of these and in the course of time your share will become higher and until that share catches up we will give you a Top-Up look at the picture look at what has happened right now to the states if you look at text to GDP ratio under the GST regime before GST that is 2015-16 to 2016-17 look at this graphic it is 6.5 percent 6.7 percent usually the expectation is at this point the tax is subsumed under GST will at least come up to 6.7 percent of GDP that was the situation pre-gst it was 6.5 percent in 2015-16 and 6.7 percent in 2000 16 17 then what happens to 2018-19 is the first year of GST it declined it falls quite rapidly from 6.7 percent to 5.4 percent next year 5.2 percent then 4.9 percent then 5.4 percent you see twin bars for these years on this graphic second bar the yellow colored bar that is the bar of that is the bar showing the share from GST that the state gets the other bar the blue bar that is what this GST begin becomes after a Top-Up from the center that is the compensation from from the center but even after the compensation the total amount that the states are getting is 5.9 percent for 1819 5.7 percent 5.4 percent 5.9 percent it is substantially lower than what the states would have earned if they were leaving these taxes together and now and now these Top-Up grants are coming to an end and that is why the states are complaining so while the center lectures the States to become more disciplined to reform their power sector to not give away freebies to not use their money to buy votes free Power free days free that free Etc the states also are rising and asking tough questions obviously bgp run States cannot ask that question but other states are now asking that question but look our share of GST has gone down we can't manage like this and these are some dangers and this has some danger for Central State relations because already we have seen so many of the states that non-bjp run States pulling away from the new pension scheme because they find they find a populist ideas in restoring the old pension scheme similarly we do not want a situation the last thing India needs is some states now threatening or maybe actually pulling away from the GST saying that they have a loss of revenues because of GST so with that I'll show you a final graphic that is figure number seven that is Devolution of taxes as a percentage of gross tax revenue now if you see if you see the period up to 2014-15 the norm then was 32 percent because remember there was no GST so Center was not collecting taxes on everything as it's doing now State said I had the power to collect taxes in many areas then the norm expected Norm was 32 percent but roughly between 2010 11 and 14 15 that is the second second term of UPA the norm was that 27 to 28 percent was paid to the States now with GST Norm has been raised to 42 percent since the norm has been raised to 42 percent the actual money transferred to the states is on an average about 32 percent they are 35 35 37 32 so if you average it out over the past five years it's only 37 percent that's eight percentage Point lower than the norm so 42 percent compared to 42 percent which is expected it's only 34 percent and that's why the states are coming cleaning in the subsequent years that is 2021 22 23 when 15th Finance commission has lowered the norm to 41 percent in fact State share has gone down further it's now 29 percent 30 percent and 30 percent and that's why the states are complaining like hell and they also have a right to complain so once again we do a lot of analysis we have a lot of opinion but we need not necessarily do data free analysis that is why when good data like this comes up this is something to welcome because we have something to talk about with evidence foreign [Music] [Applause] [Music]

Channel: ThePrint

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Keywords: ThePrint, shekhar gupta, theprint india, theprint hindi, gst in india, fiscal deficit, data on Indian states, state finances, india economics, gdp, Fiscal Responsibility & Budget Management Act, RBI, PRS report, bankruptcy

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Length: 25min 47sec (1547 seconds)

Published: Thu Dec 15 2022