Song of Election Freebies and Rising Debt of Indian States

Prof Mithilesh Kumar Sinha
Department of Economics, Nagaland University, Lumami

In the recent elections of three states, political parties have done the work of distributing freebies to middle class people which includes especially women. The announcement of such schemes before the elections in the states has benefited the ruling parties. Maharashtra is the latest example of this. The BJP had promised to give women Rs 1,500 per month just before the Maharashtra assembly elections. The scheme was included in the state budget. Its purpose was to provide financial assistance to 2.5 crore women. Especially women from rural and poor areas had to benefit from it. The impact of the scheme is clearly on the election results. The BJP and its allies won a major victory. Earlier, he was damaged in the Lok Sabha elections. All political parties promised to give from Rs 1,000 to Rs 2,500 to women every month under the scheme in the Mukhyamantri Mahila Samman Yojana (MMMSY). The BJP got victory after 27 years in Delhi Assembly. At the same time, the Finance Department says that this scheme will cost Rs 4,560 crore every year. This will cost a lot on the budget of the Delhi government.

Ultimately, free schemes can give electoral success, but their increasing cost can cause threat to the state's long -term economic health. This can be a big bet for the state governments, which can challenge economic stability at the cost of political gains

The RBI has quoted the CAG data in its report as saying that the expenditure of state governments on subsidy is continuously increasing. In 2020-21, 11.2% of the total expenditure on subsidy was spent, while in 2021-22 spent 12.9%. According to the report, the highest expenditure on subsidy has increased in Jharkhand, Kerala, Odisha, Telangana and Uttar Pradesh.  The government of Gujarat, Punjab and Chhattisgarh has spent more than 10% of its revenue expenses on subsidy.   It has been said in the report that now the state governments are giving free instead of subsidy where they are not earning any money. Free electricity, free water, free travel, bill waiver and debt waiver, all these are 'Freebies', on which the state governments are spending.  However, some states whose debt can be more than 30% of GSDP by 2026-27. Among them, the condition of Punjab will be the worst. By that time, the Punjab government may have more than 45% debt of GSDP.  At the same time, the debt of Rajasthan, Kerala and West Bengal is expected to be up to 35% of GSDP.

Table 1: Estimation of debt of States’ GSDP in 2026-27 (in %) 

Source: RBI

There is no indication that political parties in India will decrease in distributing freebies. In such a situation, despite achieving a fast economic growth rate, the state is not able to reduce the debt burden. Assessment of the financial status of the major states of the country shows that during the current financial year 2024-25, the debt burden on them will remain 31-32 percent against their GDP. These states had 32 percent debt of the total GDP during the last financial year.

The Economic Research Agency Crisil said in a report released. According to the report, this year, 13 percent of the total revenue will be spent in paying interest of debt, which is quite dangerous. The Finance Commission says that more than 10 percent of the total revenue should not be paid to repaying the debt. Crisil prepared the report on the budget of Maharashtra, Gujarat, Bihar, Karnataka, Tamil Nadu, Uttar Pradesh, Telangana, Rajasthan, Madhya Pradesh, Kerala, West Bengal, Punjab, Haryana, Jharkhand, Goa, Odisha, Chhattisgarh. The report states that 95 percent of the loan on all the states of the country is on the said states.

In democracy, voters have the power to block or allow the trend of freebies. There is a need for consensus between regulating irrational freebies and ensuring that voters are not affected by irrational promises.