New govts in 5 poll-bound States have to balance poll promises with economic realities

Five poll-bound States - Telangana, Rajasthan, Madhya Pradesh, Chhattisgarh and Mizoram, have one thing in common -- limited fiscal space for populist measures. Apart from this, the economic indices vary vastly with Telangana being among the highest per capita income States and Rajasthan with the highest rate of inflation.

As the poll schedule was announced on Monday, businessline talked to economists to analyse the state of economies of the five States. All these have higher growth rate of GSDP (Gross State Domestic Products) than the national average. But there are challenges in terms of finances. With political parties competing on populist measures, experts felt there is a need to underline the limited fiscal space available to implement these schemes post-election.

Fiscal deficit

Devendra Kumar Pant, Chief Economist with India Research & Ratings (Ind-Ra) quotes as per FY24 budget estimates, to point out that fiscal deficit of Telangana, Rajasthan, Madhya Pradesh, Chhattisgarh and Mizoram is pegged at 3.7 per cent, 4.2 per cent, 3.7 per cent, 2.9 per cent and 3.9 per cent of GSDP respectively. “Such fiscal deficit levels restrict any fiscal space to governments to undertake any unplanned expenditure,” he said.

D K Shrivastava, EY India Chief Policy Advisor said available information indicates that all these States are well above the 20 per cent debt-GSDP benchmark as per the 2018 FRBM amendment. In fact, Rajasthan and Mizoram, have debt-GSDP ratios of above 30 per cent (37.3 per cent and 41.2 per cent respectively)

“Deficit is financed by borrowing and impact of State borrowing on interest rate on the economy is the same as borrowing by the government of India. Fiscal prudence with targeted intervention for the vulnerable section will be a tightrope walk for these governments,” Pant said.

Per capita NSDP

Anil K Sood, Professor and Co-Founder of the Institute for Advanced Studies in Complex Choices said among the five States, Telangana ranks among the highest per capita States with its real per capita NSDP (Net State Domestic Products) at ₹1.69 lakh being 171.8 per cent of the national average of ₹98,000. On the other hand, Madhya Pradesh, Rajasthan and Chhattisgarh’s per capita is just 66.1 per cent, 87.6 per cent and 84.9 per cent of the national average, respectively. Though Mizoram’s GSDP data for 2022-23 not available, but the State’s annual per capita NSDP is higher than the national average at ₹1.3 lakh.

These five States also vary significantly in their demographic profile. MP, Rajasthan and Chhattisgarh’s population is growing at about 1.4 per cent per annum, which is above the national average of 1.14 per cent. Telangana’s population growth is far below the national average at 0.66 per cent. Mizoram’s population has been growing at about 1 per cent. Except Mizoram and Telangana, all other States are largely rural.

Clearly, each State has different priorities and perspective about development.

“Chhattisgarh, MP and Rajasthan must invest in raising the quality primary and secondary education, vocation skills and employment generation. Telangana’s priority should be to invest in improving quality of higher education, improve higher education enrolment rates and invest in raising quality of employment where the average household earnings a much higher income and reduce its dependence on government support,” Sood advised.

Old pension schemes

Considering the success of political parties on the promise of restoring Old Pension Scheme (OPS), the expectation is that this will be key poll issue. While RBI has raised concerns on this, economists have mixed views.

Shrivastava said restoration of OPS will lead to a longer-term commitment. “As per RBI estimates, the cumulative liability under OPS may be, on average, 4.5 times as large as under the new pension scheme,” he said. Pant felt restoration of OPS by replacing the new pension scheme will have same effect on State finances as any other expenditure by the government. “With increasing longevity of the population, under OPS, government’s pension bill will increase every year leading to a far bigger fiscal risk compared to one time fiscal measure,” he said.

Sood felt fiscal impact arising from OPS is not likely to have any major adverse impact as the government has not been creating many jobs. “But in the long run, the solution is in helping households enhance their ability to earn and creating high-valuing adding jobs so that an average household is in a position to take the risk associated with defined contribution plan,” he said.

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