Going Bust

Late last month, in a curious turn of events, Himachal Pradesh Chief Minister Sukhvinder Singh Sukhu informed the state Legislative Assembly that he, along with members of his council of ministers and chief parliamentary secretaries of the state, would not take their salaries and allowances for two months. It was the first open admis­sion that the state was in a financial crisis.

In the next two days these ripples magnified into a political quake of sorts when it became obvious the government had no money to pay salaries and pensions. These sums are usually delivered like clockwork on the first of the month. Now the payment delays are expected to last till September 10.

It was quite a climbdown from the air of triumph in January 2023 when the Sukhu government, in its first cabinet meeting, had decided to restore the Old Pension Scheme (OPS). At the time, the chief minister had said, “We are not restoring the OPS for votes but to give social secu­rity and safeguard the self-respect of the employees who have scripted the history of Himachal’s development.” Today, that notion of ‘self-respect’ is in question as employees worry when their salaries and pensions will be deposited in their accounts.

In many ways Himachal Pradesh is suffering from what can be described as the khatakhat syndrome. In April this year, at an election rally, Congress leader Rahul Gandhi had promised automatic deposits—khatakhat—amounting to ₹8,500 every month for people below the poverty line. khatakhat became a metaphor for the economic ruin that populist policies can lead to. The experiment of ‘guarantees’ that has become synony­mous with the Congress brand of politics was first pioneered in Himachal in 2022. The results of such reckless spending became obvious less than two years after the Congress government was sworn in there. It is not as if the consequences were not known. On earlier occasions, Prime Minister Narendra Modi had warned against the dangerous consequences of such populism. But these warnings went unheeded. He had warned of these dangers explicitly at an election rally in Rajasthan in November last year.

The truth is that signs of trouble emerged barely a year after the first meeting of the state cabinet. In February this year, Health Minister Dhani Ram Shandil noted the arrears due to private hospitals that had provided services under the HIMCARE scheme. These arrears stood at ₹254 crore in February and then rose further to ₹370 crore by the end of July. In August, the government severely limited the reach of the scheme and said it could no longer be availed for treatment in private hospitals. A month later the salaries crisis emerged.

The events in Himachal Pradesh could be dismissed as some­thing specific to that state were it not a malaise afflicting many others across India: Punjab, Kerala, Karnataka and other states are witnessing unprecedented fiscal stresses and even crises even as other states like Jharkhand and Telangana are indulging in unsustainable spending and heading in the same direction.

This is no longer mere ‘populism’. It is part of a trend of political desperation to either come to power or stay in power at any cost. It afflicts all parties in one way or the other. These symptoms have been visible for some time in India’s politics but the trend has now acquired dangerous proportions. Parties in power no longer think about the consequences of their spending priorities even if these hurtle states towards bankruptcy. These are consequences of political strategies available to different parties—a space that is limited unless parties are imaginative—and, in general, a loss of governance priorities among Opposition parties.

This is not a gross generalisation as the situation in very different states—Punjab, Jharkhand, Kerala, and Karnataka—is similar when it comes to populism. The common thread is that they are all Opposition-run states and have different parties presiding over them.

Consider Punjab, a state that neighbours Himachal Pradesh and is arguably the ground zero of economic populism in India. Just about the time the chief minister of Himachal Pradesh was announcing salary cuts for his ministers, Punjab was veer­ing towards another dubious economic record. In late August, The Indian Express reported that Punjab may see its electricity subsidy bill for 2024-25 zoom past its budgeted revenue deficit for the year. Budget documents show the state’s revenue deficit is pegged at ₹23,198 crore. The electricity subsidy for 2024-25 is expected to touch ₹24,114 crore. On paper this figure is ₹21,909 crore according to the state’s power regulator but if one adds the legacy dues of ₹1,805 crore (due this year) along with an interest of ₹400 crore, the total bill will exceed the state’s revenue deficit for the year. On September 5, 2024, Punjab began a partial roll­back of its bloated power subsidies. It hopes to save ₹1,500 crore by this step. But this rollback was accompanied by an increase in the prices of petrol and diesel. The power subsidy bill may not cross the revenue deficit but by a narrow margin only.

Punjab’s dire straits—and its unwillingness to reform—can be seen from another report in the paper. Punjab opted out of the PM Schools for Rising India (PM-SHRI) programme under which select government schools are upgraded with help from the Cen­tre. The state claimed that it had its own programmes of “schools of eminence” and “schools of happiness”. It opted out of PM-SHRI after it had signed a Memorandum of Understanding (MoU) with the Centre to implement the programme. As a result, the Centre withheld its share of 60 per cent, amounting to ₹515 crore. This led to a crisis of sorts as Punjab did not even have the money to pay the salaries of teachers. Ultimately, it agreed to implement the PM-SHRI plan after it realised that it needed the money on offer from the Centre even if it was loath to admit that. This resistance or cussedness on the state’s part was largely for ideolog­ical reasons. The ruling party there, the Aam Aadmi Party (AAP), prides itself on the ‘Delhi model’ of education which it is trying to ‘replicate’ in Punjab. But this went nowhere as Punjab has hardly any money left for developmental tasks after it meets a plethora of subsidies, salaries, pensions, interest repayments, etc. One item in its budget statement for 2024-25 reveals the fiscal malaise: under the subhead for borrowings, ₹57,000 crore of the estimated ₹98,831 crore is expected to come from ways and means loans. The ways and means window of the Reserve Bank of India (RBI) is meant to handle sudden, unexpected shortfalls in the liquidity position of states. Punjab has already baked this source—which is meant for very different, temporary exigencies—into its budgeted borrowings. This speaks volumes about the state’s fiscal mismanagement.

But Punjab is hardly alone in this kind of profligacy. The Jharkhand cabinet recently decided to waive off ₹3,584 crore in power dues from 39.44 lakh consumers. The decision is expected to benefit consumers covered by the Mukhyamantri Urja Khushali Yojana. This, in effect, wipes away the arrears due from nearly 40 lakh consumers in the state. In Kerala, mean­while, the state cabinet recently approved a reworking of the annual plan as well as ordered cuts in expenditures on projects and schemes. A panel led by the chief secretary and senior secre­taries will examine all projects and schemes with allocations of more than ₹10 crore. A 50 per cent cut in such projects has been approved. Kerala’s difficult fiscal condition is well known and has been so for a while. The state has a familiar problem: high expenditures, low or stagnant revenues and rising debt burdens. What is not excluded from this equation is the high level of ‘welfare’ expenditure. These expenses are justified in the name of social justice but in reality are necessary to keep social order and remain competitive in India’s endless cycle of elections.

SPACE FOR STRATEGIES

The interesting question to ask about freebies is what prompts them. The obvious political answer is that they help garner votes for parties that make promises to dish out such freebies. This is borne out by the empirical record. In Madhya Pradesh, the Ladli Behna Yojana worked in favour of the Bharati­ya Janata Party (BJP). In Karnataka, the “five guarantees” prom­ised by Congress led to its victory in Assembly elections last year. This also clicked for the party in Himachal where it promised the restoration of OPS—which was part of 10 ‘guarantees’ made by the party—something BJP did not match in its promises, knowing well that not doing so could spell electoral doom.

But beyond the ‘obvious’ political answer lies another ques­tion: Why do parties make such promises when they know such expenditures can lead to severe economic distress as is being seen in Himachal Pradesh and Karnataka?

One answer is the sheer desperation on the part of the Opposi­tion to win power after 10 years of BJP’s successful run in forming governments at the Centre and across the length and breadth of India. With the exception of a handful of states, BJP is now a power to be reckoned with everywhere. Its formation of govern­ments in Odisha and Assam—‘alien’ territories for long—has been commented on. But what goes unremarked is the panic that such results produce in the Opposition ranks. What this does to a political party—and ambitious politicians—is to indulge in whatever-it-takes strategies to win elections. That is where the problem begins. It is one thing to win elections but something very different to answer the question as to what a party will do once it forms a government on such expensive terms. Karnataka and Himachal show that these questions are not even framed properly, let alone getting a proper answer to them.

Then, there is the question of a very limited number of politi­cal strategies available across the space of strategies for differ­ent parties. By definition, this space is limited to a handful of strategies based on economic and political choices. This space cannot be expanded indefinitely. This leads to blind aping of something executed successfully by another party. Often, it makes for perverse results. Consider BJP’s strategy of wooing women voters. To meet that objective, a number of schemes, such as the provision of LPG gas connections and cheap refills of cylinders under the PM Ujjwala Yojana, are in place. Another one is the Beti Bachao Beti Padhao Yojana and yet another is the PM Matru Vandana Yojana under which cash transfers are given to pregnant women and lactating mothers. While in all these schemes the political goal is clear so are the material—social and economic objectives—ones.

But in the hands of the Opposition this seeking out of women voters went one step farther when unconditional cash transfers were implemented on a large scale. In this case, the political objectives required that the number of beneficiaries be as large as possible—greater the number of those who receive the ben­efits, the higher the probability of their voting for the party in question—but in doing so the economic objectives, if any, were lost sight of. For example, there was no differentiation between women who are better off economically and those who are not. Ultimately, it leads to either large outgoes that are not sustainable (as in Karnataka) or extensive ‘re-verification’ of beneficiaries who did not meet the qualifying standards and even asking them to re­turn the benefits already availed (as in the case of the Indira Gandhi Pyari Behna Sukh-Samman Nidhi Yojana in Himachal Pradesh).

This is a clear case of a single strategy leading to very different results in the hands of two parties. Something similar is at work in the case of other political ideas and strategies, such as tackling corruption, identity politics and, in general, developmental issues.

In evolutionary terms, the politics of freebies is at an inter­esting conjuncture. India has a long history of welfare schemes that goes back to the early decades after Independence. But at that time, when politics was not very competitive and resources scarce, these schemes were limited by their feasibility and what was considered necessary. Over time, when the political uses of such schemes became obvious and governments began to command more financial resources, the extent of these schemes underwent a qualitative change. But they were still targeted towards groups and sections for which such expenditures were considered necessary.

The real—and disastrous—changes came after 2004. From 2004 to 2008, India grew at a rapid pace and government rev­enues also increased. At that point, enterprising intellectuals made a pitch for ‘universalising’ benefits and began describing these expenditures—and the goods and services obtained by spending taxpayer money—as ‘entitlements’ or rights. The argument being that the targeting of benefits left out too many deserving persons from their reach. The flip side of the universal­ising argument—that it would cost much more money and even strain government finances—was left unstated. It also made immense political sense: if a scheme or a programme is ‘univer­sal’, it includes a far greater number of voters as compared to a narrowly targeted one. Targeting made economic sense but not political sense; universalising made great political sense but was of dubious economic value. The trick lay in building narratives in favour of ever-rising ‘welfare’ expenditures.

There has been no looking back since. In Karnataka, the government spends more than ₹50,000 crore on five ‘guaran­tees’, leaving little money for anything else. Compare these kingly sums in a single state with the nationwide spending on MGNREGA: the latter costs ₹85,000 crore for the entire coun­try. This kind of elevated spending is now part and parcel of the political system. It is a political strategy that once uncorked cannot be bottled back. The PMGKAY, which provides free foodgrain for 80 crore people, was extended by five years last December. The scheme has a tidy bill of ₹11.80 lakh crore.

Political desperation and fiscal space (at the Centre) have grown hand in hand. Now it is thought that the only way to win elections and rule states, and even acquire power at the Centre, lies through ever higher and dizzying amounts of expen­diture. Not a moment is spared to think creatively about wooing voters by pitching political alternatives that will not threaten the Indian economy itself. That space has been closed firmly at the level of states where the most extravagant promises are considered sine qua non for winning elections. The danger now is that even the Centre will not be immune from this potentially ruinous brand of politics. Come 2029 and who knows what rabbits will be pulled out?

Is there a way out of this ruinous spiral?

There may be a silver lining and, interestingly, one visible at the level of states where maximum damage has been inflicted on the economy by such spending.

ANARCHY VS ORDER

It is 4PM on Tuesday and Shanti Ram Sharma (name changed), a professor who has retired from the Dr YS Parmar University of Horticulture and Forestry in Solan, Himachal Pradesh, has stopped looking at SMS notifications on his phone. There is no sign of his pension, one that usually arrives like clockwork by the first of every month. He does not expect his money to arrive before September 10.

“We were taken in by Congress’ promises. We are not greedy. The cost of living and managing families has gone up. The Old Pension Scheme was always attractive. But now we are in dire straits as even existing pensions seem to be in trouble,” he tells Open. It is dangerous to draw conclusions from a single instance and isolated anecdotes but this belated realisation that their state is in trouble is something of a trend in Himachal Pradesh now. Salaried government employees and pensioners in the state number around 4.05 lakh (in a population of around 77 lakh). While just a tad higher than 5 per cent of the total population, the “government sector” is important. As seen from the budget doc­uments for 2024-25, salaries and pensions eat away 65 per cent of the state’s net revenue receipts. Of the net revenue receipts of ₹42,181 crore (for 2024-25), a lion’s share is made up of grants-in-aid from the Centre and the state’s share of Central taxes. Together, they account for 55.5 per cent of the net revenue re­ceipts. As such, Himachal Pradesh, a special category state, gener­ates precious little revenue on its own but fritters away a gigantic portion of what it gets from the Centre on salaries and pensions.

This class of voters, the state’s salariat, was instrumental in voting BJP out of power in late 2022. Now, barely 21 months later, there is an air of disenchantment with the Congress government.

The limitations of ‘freebie politics’ are now visible across wide swaths of India. Here, states can be put into three buck­ets. There are states like Himachal and Karnataka where freebies have wreaked ruin on state finances and the political effects are visible less than two years after Congress was voted to power. Then there are others where the economic effects of these freebies are quite visible and equally damaging as anywhere else but where the political effects are attenuated due to specific religious or cultural factors. Examples in this class include Punjab and Kerala. Then there is a third class of states where freebies are managed within the budgetary limitations but dole is distributed nonetheless. In none of these three types of states are freebies justifiable on economic grounds. They are just a part of how politics is organised across India.

There is now a keen contest between the forces of economic anarchy and the reaction to these forces after the effects of khatakhat populism have become obvious. The result is that there is a set of states and their voters who are happy to accept populism and another set that has seen the effects of such policies and where reaction against these is setting in. Where the political equilibrium will be established between the two forces is yet to be seen and is still some distance away. In some states, the promises of freebies on a reckless scale are so appealing as to dent the possibility of any rational politics. Punjab and Kerala are likely to remain in that orbit. In other states, the dangers of eco­nomic stasis are already clear (Himachal Pradesh and Karnataka) while yet others—such as Telangana, where Congress ‘guaran­tees’ are being implemented with gusto, and Maharashtra, with its own set of freebies under the current National Democratic Alliance (NDA) government—are in an indeterminate zone.

The trouble is that voters realise the dangers of high expen­diture on freebies when state governments are close to the fiscal abyss. Short of that, no individual voter or even group of voters cares for the consequences. It is hard to say why. One possible explanation is that ordinary voters do not have the necessary information to understand these dangers. Another, equally pos­sible, explanation is that dangers that seem distant are consid­ered less threatening than the ones that can be seen clearly. In Himachal Pradesh, for example, the mounting and unpaid bills from the HIMCARE scheme should have alerted voters there. And the issue was reported widely in the local press. But there was no reaction. The realisation that freebies had created prob­lems is of very recent vintage when it became obvious that the state government had run out of money. It is one thing to blame political parties for their ruinous political strategies but political myopia is a far more dangerous problem at the most important level of India’s democracy: the voters themselves. It is considered impolite if not downright politically incorrect to ‘blame’ voters for the choices they make, but it is also a reality that a vast section of the electorate gets taken in by the blandishments on offer.

Arvind KejriwalBhagwant MannHemant SorenHimachal PradeshJharkhandKarnatakaPunjabSiddaramaiahstate governmentsStates' economySukhvinder Singh Sukhuwasteful populism