Gujarat debt: Digvijay Singh's curiously selective economics

Gujarat's high per capita debt is a reflection of growth not profligacy, say economists

As the battle for India heats up, the fervor for mud-slinging matches and misinformation campaigns has gotten shriller. And amid the bombardment of half truths being hurled about with reckless abandon by political parties, it’s become vital to pause every once in a while and counter myths.  
 

Late last week, Congress leader Digvijaya Singh attacked the Gujarat model of development saying the state has the highest per capita debt burden in the country. “He (Modi) has immersed the whole Gujarat under debt with his ambition to become the Prime Minister; he will immerse the whole of India also under debt” said Singh who was talking about the outstanding liabilities (public debt) of state governments as percentage GSDP (gross state domestic product). 
 

Singh isn’t wrong of course. Gujarat’s outstanding liability as a percentage of GSDP is higher at 25.2% vs. the 24.13% average in all other states. What’s equally true though is that Singh has been ham-handedly selective with his information. According to Planning Commission Data, Gujarat’s public debt was 38.78% of GSDP when Modi became Chief Minister in 2001-02. So contrary to Singh’s claims of Modi having ‘immersed’ Gujarat under debt, he has actually managed to bring down the public debt to GSDP ratio by 14%. 
 

That in itself is credible. But what’s more admirable say experts, is the fact that this ratio has been brought down in tandem with an uptick in capital expenditure. Modi, contrary to Diggy’s claims has managed a double feat. 
 

First off, high debt in itself isn’t a bad thing. Many good companies are highly leveraged because they borrow money to invest and create capital assets which contribute to higher revenues. Similarly, “if the states are raising money, the utilization of that debt is being properly channelized and revenue is being generated because of higher growth, then it is not necessarily a bad thing” says Abheek Barua, Chief Economist at HDFC Bank. “There is a tendency of the political class to use isolated indicators. But on the capital spending side Gujarat has actually done very well, which shows debt is going up in creating assets, and not being squandered away.” 
 

Madan Sabnavis, Chief Economist at CARE Ratings which has done a detailed analysis of state government finances agrees. According to Sabnavis, Gujarat is fully compliant on all FRBM norms and the high debt actually is a reflection of a progressive state that’s growing. “One must also remember that Gujarat has a revenue surplus, so the debt is not being used to finance a revenue shortfall, but is being used for capital and social spending” says Sabnavis.
 

 Gujarat’s aggregate capital disbursement to capital outlay ratio was over 80% according to FY14 budget estimates, much higher than the 68-70% average for all the states put together. 
 

Digvijay Singh’s salvo at the Gujarat Chief Minister seems preposterous as it is, and all the more incongruous when compared with the condition of Congress ruled states and the situation at the centre.  While the all India average debt liability of states might indeed be lower than Gujarat’s, guess which state has the highest per capita debt liability? It happens to be Congress-led Manipur. In fact, of the 19 Indian states with a high per capita debt ratio, only 4 are BJP led, while 7 are ruled by the Congress and its allies according to reports. 
 

While at it, let’s also balance the sorry state of the central government finances against those of Gujarat.  The FRBM rules specified a reduction of fiscal deficit to 3% of the GDP by 2008-09. The center has long breached that level, with the deficit hovering around the 4.8% levels. Gujarat meanwhile has contained it at 2.57%, restricting the deficit at the 3% mark by 2011-12 itself. 
 

Numbers speak louder than claims, but in a bid to outshine shine one another our politicians seem to have made it a habit to err on the side of accuracy.