Alarm bell rings for AP saving
Sri Lanka’s economy has been hit by the pandemic, with travel restrictions hitting tourism; exports of textiles, clothing and tea suffered a decline due to the collapse of world trade caused by the pandemic; and remittances have been affected by slowing global growth. In addition to the pandemic, public policies also contributed to the crisis – a sharp drop in direct and indirect taxes just before the pandemic; the shift to organic farming which has led to soaring food inflation and shortages of essential products; and ambitious infrastructure projects financed by expensive Chinese debt. This is the crux of the Sri Lankan problem.
But why are we talking about PA becoming another Sri Lanka? Besides politics, the argument seems plausible from another perspective – the fiscal health of the PA. The fiscal health of Indian states deserves careful assessment as leaders, especially those belonging to regional ruling parties, compete with each other to offer “Revdi” or freebies to voters. Until the onset of the pandemic, the average GFD-to-GDP1 ratio of states remained modest at 2.5% from 2011-2012 to 2019-2020, below the 3% ceiling of the Fiscal Responsibility Legislation (FRL).
There were, however, significant variations between states – while Andhra Pradesh, Kerala, Punjab and Rajasthan recorded an average GFD above 3.5% of GSDP, Assam, Gujarat, Maharashtra, Odisha and Delhi recorded ratios below 2%. A study carried out for the RBI by experts reveals that it has deteriorated sharply in 2020 with a sharp drop in income, an increase in expenditure and a sharp increase in debt to GDP ratios. As the report indicates, AP’s debt service was over 10%.
A total of 10 states were considered for the study as they were marked as stressed states and PA, Bihar, Rajasthan and Punjab exceeded both the debt and fiscal deficit targets set for 2020-21 by the 15th Finance Committee. AP has failed all parameters and it is said that stress testing would only add to the distress as the state government’s debt-to-GDP ratio is expected to remain above 35% in 2026-27. Among the corrective measures suggested, it should restrain its expenditure of revenue by reducing its expenditure on non-meritorious goods in the short term.
In the medium term, it should strive to stabilize debt levels. Large-scale reforms in the electricity distribution sector to reduce losses from DISCOMs are needed. Welfare measures aim to help the oppressed in society get out of their basic life. There is always a timeline for phasing out these benefits. This should happen if governments create employment opportunities and provide livelihoods for people. However, there is no intention to do so and no indication that direct money transfers will be restricted at any given time. The usual practice in our electoral politics, however highly reprehensible, is to offer money to voters. We have seen this happen more in Andhra Pradesh.
Now, the DBT has become more of a tool to ensure voters are forever “beholden” to the leader with these programs. And they call it a welfare state! The DBT philosophy as envisioned is entirely different from that practiced in the PA and it emphasizes it beyond redemption. The PA economy is heading south (if not to Sri Lanka).