Competitive populism has put the finances of several states in peril. Fixing the faultlines starts with making a distinction between unmerited subsidies and targeted benefits for the needy
(Illustration: Saurabh Singh)
Revdi is a common sweet snack in north India. It became a familiar word throughout the country when Prime Minister Narendra Modi used it as a very identifiable metaphor for a culture of freebies fast gaining popularity among people, especially in the thick of elections. Inaugurating the ₹14,850 crore, 296 km Bundelkhand Expressway in Uttar Pradesh (UP), he exhorted people, the youth in particular, to outright reject the “revdi culture” which would destroy the country if allowed to persist unchallenged, and to focus only on development. The culture of freeloading would, the prime minister said, destroy India if allowed to thrive unchecked. “Your generation has to be highly vigilant to uproot this,” he said, adding, “The people spreading this culture believe they can buy your votes by feeding you sweets to grab power. A revdi culture can never build roads, railways, defence corridors, and hasten India’s progress. We should all unite to reject this sort of politics flatly.”
Grandiose announcements of free electricity, free water supply, free rides on public transport, huge subsidies on state-supplied goods and services, especially in the pre-poll season, by various political parties have today entrenched competitive populism, leading Finance Commission Chairperson NK Singh to point out that this race to provide sops would prove a “quick passport to fiscal disaster” if normalised. This came after a Reserve Bank of India (RBI) report called attention to the disastrous position of state finances and enhanced debt stress. Besides, the Supreme Court directed the Union government to consult the Finance Commission on whether it was possible to regulate the distribution of sops, using public money, by political parties. In 2021-22, for instance, the debt to GDP ratio of Punjab reached 53.3 per cent. Telangana has committed 35 per cent of revenue receipts, almost 63 per cent of the state’s own tax revenue, to bankroll populist schemes without even a study of the outcomes. In Maharashtra in 2020-21, loan waivers accounted for spends of over ₹50,000 crore, with little indication on whether the waivers were targeted at needy and eligible farmers.
Singh was careful to point out the difference between merit and non-merit subsidies on the one hand and targeted welfare spends for the eligible, based on accountability and outcome reports, on the other. While announcements of untenable universal subsidies is the basis of the revdi culture of competitive populism, targeting well-identified beneficiaries through merit-driven subsidies, based on clear outcome reports and accountability, forms the core of the second. The latter firmly plugs all waste of resources, freeing up funds for building long-term infrastructure in all sectors, besides focused delivery of subsidies to only highly needy and eligible beneficiaries. The Modi government identified, for instance, 800 million eligible people and bankrolled them for 24 months during the pandemic, supplying them free foodgrains to shore up lost livelihoods. That ensured compensation through basic benefits, leaving funds for building roads, hospitals and other infrastructure, even while right-sizing subsidies for welfare to the needy.
But how perilously close to empty coffers and massive debts some state exchequers had come, thanks to sops aimed at power grabbing, became clear when the “Sultan of Subsidies”, Delhi Chief Minister Arvind Kejriwal, announced just a day after the prime minister’s revdi culture comment that from October 1, power subsidy benefits would be given only to those consumers who opted for it. This made it very clear how untenable his policy of power subsidies to Delhi’s voters (since 2015, the Aam Aadmi Party, or AAP, government has been giving 100 per cent subsidy to those using up to 200 units of power per month and a subsidy of ₹800 per month to those using anywhere from 200 to 400 units) was. On average, about 90 per cent, or 3,039,766 of Delhi’s 5,818,231 power consumers, get zero bills every month, and 1,659,976 get the ₹800 subsidy. The amount of subsidies released in the first year (2015-16) of the AAP government was ₹1,442.76 crore, which increased to ₹2,939.99 crore in 2020-21. For 2022- 23, the government has allocated about ₹3,250 crore for power subsidies.
Untargeted and highly unsustainable subsidies to voters in the power, Public Distribution System (PDS), health, and education sectors—as well as free distribution of white goods like colour TVs, pressure cookers, computers and tablets, even jewellery for weddings—have formed a bulk of the revdi culture espoused by political parties in some states to win elections in the last several years. Low or zero tax realisation on these subsidised or free sectors weakens state finances that could otherwise be devoted to development in social sectors and infrastructure. Free or highly subsidised power to all consumers has driven the finances of states perilously close to rack and ruin. Subsidy payments by governments were estimated to make up 16 per cent of discom revenues at an all-India level in 2021-22, according to an ICRA report in March. Promises of free electricity means that discoms (distribution companies) and gencos (generation companies) will get delayed payments for the electricity supplied. The state governments resorting to these populist measures of free power are well aware that their revenue deficits will rise. In turn, that spells delayed payments to discoms and gencos from the governments. Worse, some governments are now forced to take on debts to fund these deficits, too. Energy is the backbone of any economic activity and can, on no account, be considered a universally gratis right. Yet, it remains a sector central to the revdi culture fostered by state governments. The short-sighted and frivolous promises of some political parties, especially the ones touting free electricity, are primarily responsible for irregular and erratic power supply and an underdeveloped electricity grid. Discoms, therefore, have little incentive left to make the power grid efficient when their dues are delayed or not cleared, especially since they have to resort to short-term borrowings to pay for energy supply from the power gencos.
Unsurprisingly, speaking at an event called “Ujjwal Bharat, Ujjwal Bhavishya” recently, Prime Minister Modi exhorted the states to immediately clear their massive dues to discoms and gencos. Pointing out that several states owed around ₹1 lakh crore to power discoms and gencos, he said discoms alone had more than ₹60,000 crore in dues from government departments and local bodies, in addition to ₹75,000 crore in arrears, making it difficult for those companies to provide quality power all day.
The total dues of states and Union territories to gencos (CPSEs, IPPs and REs), excluding state-owned gencos, is ₹1,01,442 crore, of which CPSE dues alone are ₹26, 397 crore. The outstanding dues from states and UTs to discoms are ₹62,931 crore. The balance of subsidy owed to discoms is ₹76,337 crore as of May 2022, hardly loose change. Little wonder that the power sector is wracked by huge difficulties in both power supply and power quality. Despite all this, the AAP government in Punjab is busy recklessly putting out ads worth several crores of rupees advertising its plans to give free power in that state as well, on the Delhi model. Smart metering is one way to de-stress power discoms, especially in view of the fact that a 36 per cent reduction in exceptional billing was observed by four discoms in UP, and a pilot project in Srikakulam district in Andhra Pradesh also showed a 36 per cent reduction in power consumption through smart-metering. Currently, India has the capacity to generate 403 GW of electricity through various sources. But transmission losses alone stand at more than 20 per cent in India, against the desirable range of 5-8 per cent in developed countries. The only solution to combat these losses is to invest in better infrastructure and these investments are ideally undertaken by the companies involved in either generation or distribution. But prolonged dues and pending payments restrict these companies from investing in infrastructure as their income barely covers the cost of operations, let alone any additional investment. This creates a system of ageing transmission lines, huge leakages, and rising costs of electricity.
External Affairs Minister S Jaishankar, in a recent briefing to political parties on Sri Lanka, warned of the perils of weak revenues and their disastrous impact on society and the social costs incurred. According the International Monetary Fund (IMF), the Gotabaya Rajapaksa government invested heavily in short-term solutions aimed primarily at fulfilling election promises and to alleviate the heavy burden of taxes on citizens. What followed was that Colombo was unable to procure funds to keep the country functioning, especially after crucial decisions, such as switching to organic fertilisers without first building a bank to fall back on. That move led to a huge shortage of fertiliser and food production, making food prices shoot through the roof. Coming on the back of two years of the pandemic, which the government was unprepared for and felled the crucial tourism industry—the spine of the island nation’s economy—and a host of ill-thought infrastructure projects meant a runaway rise in the fiscal deficit, to bridge which the government increased borrowings and unsustainable debts substantially. The IMF points out liabilities are a risk to governments owing to the large outstanding debt and losses to public sector enterprises (PSEs). Governments issue guarantees to public sector enterprises’ borrowings from financial institutions. Such a guarantee makes it simpler for PSEs to get loans. Sri-Lanka’s Fiscal Management (Responsibility) Act consistently revised the limits of these guarantees as a percentage of GDP. It was only 4.5 per cent till 2012. It went up from 7 per cent between 2013 and 2016 to 10 per cent between 2016 and 2021, and to a whopping 15 per cent after 2021.
Reassuring attendees of India’s status as a robust economy, Jaishankar asserted that the Indian economy was far more resilient. Compared to advanced economies, where the debt to GDP ratio is over 100 per cent and, in some cases, even 200 per cent, India has registered only a 73.95 per cent debt to GDP ratio. Its external debt is still at only 19.9 per cent of GDP while the US has an external debt to GDP ratio of 127 per cent. However, although India’s position is strong, some states have posted worrisome numbers thanks mainly to extremely populist policy measures and the resultant, and often unaccounted, waste of resources, including tax. Telangana, for instance, has posted the highest growth rate in taking loans at an alarming rate to meet its deficit, way higher than the average 13.3 per cent or lower recommended. Despite being a fairly new state, it has already registered a significant revenue deficit in a short period. Against an average of 13.3 per cent or lower, Telangana now posts the highest growth rate in taking on debt to meet its deficits, at an alarming rate. Again, committed expenditures, including interest payments, pension and salaries, restrict the state’s welfare ability and those who can cap this at the average 36 per cent or lower show better economic health. As a percentage of GSDP (Gross State Domestic Product), total outstanding liabilities are required to be an average 32.1 per cent or lower. Although debt is needed to undertake development projects, including infrastructure, too much debt hampers the state’s ability to undertake imperative welfare measures. States like Punjab, Rajasthan and West Bengal are high-debt states, not due to their infrastructure projects but due to the mismanagement of finances which, in turn, leads to high revenue deficits. Revenue-deficit states need higher debt to meet their expenditures and tend to go into a vicious cycle of debt entrapment, rather like Sri Lanka. In India, states such as Rajasthan and Punjab are already under high-debt stress and a higher revenue deficit can only force them into more debt.
Increasingly, some states have shown a strong preference for short-term populist fixes over long-term solutions despite precarious financials. Ideally, states should not register outstanding guarantees (as a percentage of the projected GSDP in 2022-23) over an average of 6.6 per cent or lower. Some states have even taken loans secured against assets like municipal parks, collector’s office, taluk office, courts, hospitals, etc. Entities which do not have revenue streams to service the loans are getting loans based on state government guarantees. Although legal, debts through these avenues should be kept at a minimum, but they are not. The Union finance ministry has been highlighting since March how off-budget borrowings bypass the net borrowing ceiling, or NBC, that the Centre has prescribed for states in a given year. For 2022-23, the Union government has fixed a borrowing cap of ₹ 8.57 lakh crore, or 3.5 per cent of GSDP. Between 2019-20 and 2021-22, off-budget borrowings by the state have been pegged at an average 0.7 per cent or lower—the lower, the better. Again, interest payments as a percentage of revenue expenditure have been pegged at an average 12.6 per cent or lower while capital outlay to total expenditure between 2015 and 2020 registered an average of 13.6 per cent or higher—the higher, the better.
Populist measures are affecting state finances drastically and severely curtailing development and genuine welfare and merit-based subsidy spends for the long run. Based on the ideal levels pegged and averages registered on multiple counts among states, both Telangana and Punjab have witnessed high revenue deficits while Gujarat and UP have revenue surplus. UP is the only state that has a gross fiscal surplus while all other states have gross fiscal deficits, with Tamil Nadu topping this list. Punjab has the highest liabilities as a percentage of GSDP while Telangana has the highest growing liabilities at more than 30 per cent growth. It also has the highest outstanding guarantees at more than 11 per cent of GSDP. Punjab has high debt stress, and a fiscally deficit economy with a majority of its expenditures going towards the servicing of the debt. Interestingly, this is closely comparable with the figures from the Sri Lankan economy. Telangana is a fairly new economy but shows signs of gross mismanagement of public funds. It has the highest outstanding guarantees at 11.08 per cent of GSDP as against an advised 5 per cent. Moreover, as noted, its debt is growing at an alarming rate.
It isn’t power subsidy alone that is bloating the non-merit subsidy spends for state governments and hindering India’s progress on the development front. Both fertiliser and food subsidies are also big, although the budget estimates (BE) have been pegged lower for 2022-23. While the actual food subsidy spends for 2020- 21 were pegged at ₹5,41,330 crore, the revised estimate (RE) for 2021-22 was pegged at ₹2,86, 469 crore. BE for 2022-23 has been pegged at ₹2,05,831 crore. The peak of food subsidy spends was during the pandemic, supplying free foodgrain to thousands. Again, the actual spend on fertiliser subsidy by the Union government in 2020-21 was ₹1,27, 922 crore. RE for 2021-22 is much higher, at ₹1,40,122 crore. For 2022-23, the subsidy outgo (BE) is at a lower ₹1,05,222 crore (based on data from the finance ministry), but it remains to be seen how much higher the actual spends are pegged for the year. Both subsidies have for long been a massive white elephant and a big headache for the government. For 2022- 23, strong political will has meant that fertiliser subsidies were cut significantly at the BE level.
In the early 1980s, Janardhan Poojary became synonymous with loan melas, cheap credit and easy loan handouts by public sector banks (PSBs). Poojary, then minister of state (MoS) for finance in the Indira Gandhi government, strong-armed PSBs to fork out loans to farmers and others across India with nil or minimal security or collateral, much to the anguish of hundreds of bankers. His actions, part of the 20-Point Programme of the time, jeopardised the health of PSBs. Poojary’s loan melas were forced into being to counter Ramakrishna Hegde’s Janata Party government in his home state of Karnataka. This spelt the peak of policies aimed at hollowing out nationalised banks with completely unaccounted loans as mass vote-buying strategies for Congress. Poojary was the high priest of the freebie culture authored by Congress at the expense of both PSBs and the people. The intent was apparently altruistic, flowing from the Differential Rate of Interest, or DRI scheme, of the 1970s that guaranteed highly subsidised loans to marginalised sections and was meant to link them to the banking system while ensuring they did not get bypassed routinely for loans. It was an era when it was common knowledge that bank loans were for the privileged and could only be secured through greasing palms and the Congress government was anxious to dispel the impression that nationalised banks were compromised in granting loans and biased against the poor.
However, bad implementation meant most banks exceeded their quota by wide margins and were forced to ask for the ration card as the loanee’s proof of identity. This translated into some 90,000 fake ration cards in Bangalore alone, with most ration-card holders believing that this, along with a passport-size photograph, was all that was needed for a loan up to ₹5,000. Some ₹66 lakh in loans (a sizeable sum in those days) was distributed to about 2,000 loanees in the city by Syndicate Bank branches, adding up to bad loans and wrecking the books of many banks. Consequently, stricter collateral requirements and margins on collateral were imposed by banks.
Loan melas and easy loans by PSBs were not only big populist blows to weaken public finances. Farm loan waivers, later in India’s history, were another policy that wrecked states’ account books. In 2020-21, Maharashtra alone has taken a hit of ₹45,000- 50,000 crore to the exchequer due to farm loans. In 1990, VP Singh waived ₹10,000 per borrower, using loan waivers as a potent political tool. That failed to work effectively, though, and Singh later resorted to the Mandal Commission report to boost his government’s political heft. In 2008, P Chidambaram, as Union finance minister, indulged in a reckless farm loan waiver that led to the further weakening of banks. That loan waiver was topped significantly by Manmohan Singh in 2009, helping his government to return to power. A bailout programme for 37 million farmers resulted in waivers of ₹52,200 crore, leading former RBI Governor Raghuram Rajan to acknowledge that such programmes dented credit discipline among farmers and actually restricted their access to loans. Former CACP (Commission for Agricultural Costs & Prices) head and ICRIER (Indian Council for Research on International Economic Relations) professor Ashok Gulati, too, pointed out that one-time loan waivers did nothing to help debt-ridden farmers. He argued for political will to initiate significant reforms in the sector, including land leasing, streamlining the incentive structure to promote private sector investment, as well as policy changes for essential commodities and markets. At the time in 2014, some 52 per cent of India’s 90 million farm households were burdened with debt. In states such as Telangana and Andhra, the parties that came to power relied heavily on farm loan waivers to do so.
Reformist governments have had to clean up the mess in the banking system. The Modi government’s Insolvency and Bankruptcy Code enabled banks to seize defaulters’ assets. Modi, in fact, used his first term to ensure fiscal prudence and address the balance sheet crisis. The Insolvency and Bankruptcy Code (Amendment)
was promulgated on April 4, 2021. Along with other legislation, it helped banks recover an estimated ₹5.5 lakh crore-plus from accounts that were written off. Strengthening prudential norms and increasing the Provisioning Coverage Ratio (PCR) requirement for banks, including PSBs, have by and large protected banks from huge dents to their finances. In addition, the National Asset Reconstruction Company (NARCL) is expected to clean up the balance sheets and boost credit growth through the infusion of fresh capital from the sale of bad assets. Under the Modi government, banks have written off but not waived bad loans as was done under previous governments. The latter means that banks have given up their right to recover debts and the former is a technical adjustment.
As NK Singh pointed out in a write-up, there is a need to make a clear distinction between freebies and targeted, merit-based welfare spends on the poor and marginalised. This is the distinction between the large food spends of the Modi government during the two years of Covid to bolster the livelihoods of 800 million people and the one-off subsidies doled out by previous governments on loan waivers and through loan melas. That brings to focus the inability and lack of political will and policy ideas of earlier governments—despite all the Garibi Hatao sloganeering—to build long-term and sustainable social infrastructure in health, education, power, agriculture, and so on. The question also turns the light on the largescale corruption nurtured by erstwhile governments.
Fixing the faultlines in the eco-political system and plugging all corruption and waste, at least minimising these, would mean significantly up-scaling funding for both welfare and development. Equally, it would mean ensuring that the results are transparent and the delivery efficient. Two key issues in recent years have tended to bring pressure on corruption, waste and leakage: Aadhaar and the Direct Benefit Transfer (DBT) that makes mandatory direct delivery of subsidies on welfare programmes to pre-identified and eligible beneficiaries. While the United Progressive Alliance (UPA) government did not take political advantage of either of these, the Modi government scaled-up their use to the next level which resulted in electoral dividends for the Bharatiya Janata Party (BJP). As of March 2021, savings from the use of DBT were a stupendous ₹2.28 lakh crore. On the food and PDS accounts, savings totalled ₹1.01 lakh crore. About 3.99 crore fake ration cards were identified and weeded out.
From only consumption, however, the criteria for defining poverty are now gauged also through delivery of essential services, including power. Welfare needs are today pegged to the readings measured by these criteria: denying an Indian these basic services, including power, health and essential education, cannot be countenanced by any yardstick anymore. Power supply was in earlier decades hampered severely by the lack of infrastructure. Today, infrastructure has reached practically every village in the country.
However, the perilous finances of states like Punjab, Tamil Nadu, Delhi, Rajasthan, West Bengal and Maharashtra have made it critical to make a distinction between universal delivery of essential services and a targeted, merit-driven delivery. Demand-based subsidies in the supply of such essentials to the most eligible are one road to take. Employment guarantee to the neediest based solely on demand, such as the Mahatma Gandhi National Rural Employment Guarantee (MGNREGA) scheme, is a case in point. Another road to take is public awareness and education, giving people a stake in the nation’s progress when they voluntarily give up subsidies so that those funds could be used to help real beneficiaries as well as investing in long-term social and physical infrastructure. In the case of subsidised gas, for instance, the Modi government chose to appeal to the public through the “Give It Up” slogan for those who could afford to buy at full price, thus allowing more of the neediest to be served through subsidies. Clubbing all subsidies under a single label does a gross injustice to the needy—inasmuch as corruption, waste, leakage and universalisation of subsidies do to them and to the country’s economic growth. That would be missing the wood for the trees and the Modi government, which wants errant states to clean up their act urgently, appears to have grasped this well.