Overview of State Finances and Freebies
Freebies have become a common feature in the political economy, raising concerns about the stability of state finances. However, aggregate state fiscal deficits have remained largely stable, below 3% of GDP from 2017-18 to 2023-24, except during the pandemic year 2020-21 when it rose to 4.1%.
Fiscal Deficit Trends
- The fiscal deficit increased to 3.3% in FY25 from 2.9% in the previous year.
- In FY24, 0.4% of the fiscal deficit was due to the Special Assistance to States for Capital Assistance Investment (SASCI), considered above the regular limit.
- The 16th Finance Commission recommended a fiscal deficit limit of 3% of GDP for states, continuing this trend to FY31.
Revenue Deficit and Asset Generation
Revenue deficit represents the gap between current expenditure and revenue. Since 2008-09, it has remained below 1% of GDP, with exceptions during economic crises.
- States have been utilizing excess expenditure for capital investments, aiding in sovereign debt repayment.
- Sovereign debt is reducing, projected to be 27.2% of GDP by 2030-31 if states borrow within limits.
Debt Concerns in Highly Indebted States
Pertaining to states like Punjab, Himachal Pradesh, West Bengal, Kerala, and Rajasthan, public finances are considerably strained.
- Punjab and Himachal Pradesh have sovereign debt exceeding 40% of their GSDP.
- Fiscal deficits are above 3% in these states, limiting their capacity for capital expenditure.
Stable Financial States
States such as Delhi, Odisha, Gujarat, Maharashtra, and Uttarakhand maintain healthier financial positions.
- Odisha, with a fiscal deficit of 3.5% of GSDP, maintains a revenue surplus, funding freebies without borrowing.
- Maharashtra, although close to a 3% fiscal deficit, has a manageable debt level, but increasing revenue deficits due to schemes like CM Ladli Behna Yojana.
Impact of Freebie Culture
Unconditional cash transfers to women have increased in prevalence and financial impact.
- Transfers rose from 0.01% of GDP in FY21 to 0.57% in FY26, with 12 states participating.
- Highest transfers were recorded in Jharkhand (2.1% of GSDP) and significant in states like West Bengal, Madhya Pradesh, Odisha, Chhattisgarh, Kerala, and Maharashtra.
Conclusion
While aggregate fiscal stability is maintained, the fiscal health of individual states varies significantly. Political leadership is crucial in balancing freebie distribution with fiscal constraints, ensuring sustainable financial practices.
