State freebies to upset fiscal balance says Emkay

Mumbai: An increase in populist spending in poll bound state elections could upset the delicate fiscal balance that states have been maintaining so far. This increase in spending comes at a time when states are already facing revenue mobilisation challenges. Central transfers to states are expected to fall, and states’ own tax revenue growth is projected to be an unrealistic 18 per cent in FY25, according to a report from brokerage firm Emkay Global.

Its analysis of 19 major states over the past 20 years shows that while this is not a new phenomenon and states on an average have had higher fiscal deficit (FD) to Gross state domestic product (GSDP) by 0.5 per cent and revenue expenditure to GSDP by 0.4 per cent during election years versus the preceding year, it is the prevalence of populist promises in this cycle across the political spectrum that is worrying.

The report cites the example of Maharashtra which announced the ‘Ladki Bahin’ scheme, a copy of Madhya Pradesh’s ‘Laadli Behna’ scheme that helped the BJP win back power in the state. The Ladki Bahin scheme will cost Rs 46000 crore annually as a result the fiscal deficit of Maharashtra will be much higher than interim (2.6 per cent versus 2.3 per cent), entirely due to higher revenue expenditure led by a bevy of populist spending programs.

States that have recently held or are about to hold elections, such as Karnataka, Chhattisgarh, Madhya Pradesh, Rajasthan, Telangana, Andhra Pradesh, Odisha, Haryana, Maharashtra, and Jharkhand, have all announced or are expected to announce budgets with higher fiscal deficits due to various freebies such as farm loan waivers, stipends for unemployed youth, free electricity and gas cylinders, and so on.

Additionally, Q4FY25 could be a repeat of Q4FY24, with states tapping the market far more with Rs 10.6 lakh crore in gross state developmental loans.