Fiscal burden of subsidies triggers political debate, rethink on freebies

Political parties routinely make pre-poll promises of subsidies and freebies, but the fiscal burden of such guarantees weighs heavily on state budgets once in power

The political contestation over ‘freebies’, or populist schemes, is back with Prime Minister Narendra Modi urging the people to be wary of the Congress’ “fake promises” and the latter’s leaders hitting back by pointing out the “unfulfilled” promises of the Bharatiya Janata Party (BJP)-ruled governments at the Centre and in states. 

 

The subtext, however, of the verbal volleys between the BJP and Congress leaders and social media posts is the increasing fiscal burden on the state governments because of the slew of election promises that the two main national parties, as well as some of the regional parties, have made to the electorate, but now find too fiscally onerous to honour. 

 

A recent report by Emkay Global Financial Services Limited (EGFSL) pointed out that nearly each of the 10 states that went to polls in 2023 and 2024 has introduced new welfare schemes, or freebies, regardless of party or ideology. Emkay’s chief economist Madhavi Arora has said that the “election-led populist spending by states is unprecedented and increases risk of fiscal slippage in FY 25”. She said it may also lead to higher borrowings by states. 

 

According to her, the worst offenders are Chhattisgarh, Madhya Pradesh, Maharashtra, Bihar, Odisha, Jharkhand and Andhra Pradesh – all of which either have had Assembly polls recently or will do so by the end of 2025. States’ FY25 budget estimates for subsidies have shot up to Rs 3.7 trillion on the back of various freebie promises, equivalent to “8.6/8.7 per cent of aggregate revenue receipts/expenditure (the highest since FY21)”, she said.  

 

According to the Reserve Bank of India, outstanding liabilities of states stands at Rs 83.32 trillion, up from Rs 74.96 trillion last year and Rs 25.10 trillion a decade back. Estimates suggest that the welfare schemes that provide for a monthly allowance for women cost state governments, including Assam, West Bengal, Karnataka, Maharashtra, Odisha, Rajasthan and others, as much as Rs 1.3 trillion a year.  

 

Already, the fiscal pressure seems to be telling on the Madhya Pradesh exchequer. Sources in the state government say there is some rethink over its Atal Gruha Jyoti Yojana in order to reduce the subsidy bill that the scheme incurs. Under the subsidy programme, the state government provides 100 units of power at Rs 100, which is likely to be increased to Rs 150 for the same number of units consumed. Also, the subsidy, which is currently available for consumption of up to 150 units, will be reduced to 100 units. According to a state government estimate, the subsidy is availed by 10.8 million consumers, which will decrease to 4.6 million, and lead to an annual saving of Rs 4,000 crore. Similarly, slabs are also likely to be changed for subsidised electricity available to farmers. 

 

According to the Maharashtra economic survey, the state’s outstanding liabilities stand at Rs 7.11 trillion, with interest payments of Rs 48,578 crore. Nonetheless, the Mahayuti government has rolled out the ‘Majhi Ladki Bahin’ scheme, for which it has allocated Rs 46,000 crore annually. Additionally, it has promised a top-up on the Centre’s PM Kisan Nidhi scheme and Rs 50 assistance for each desi cow to farmers. Maharashtra CM Eknath Shinde has promised that the allowance for women would be doubled to Rs 3,000 if his government were to return to power. 

 

In neighbouring Karnataka, Deputy CM DK Shivakumar hinted that the ruling Congress government could roll back its ‘Shakti’ scheme that allowed free travel to women in state transport buses. This led to Congress president Mallikarjun Kharge advising the party’s leadership to refrain from making injudicious statements. While Chief Minister Siddaramaiah later rejected reports that the state government could revisit the Shakti scheme, Karnataka has to spend Rs 65,000 crore on the Congress’ five guarantees, including one that provides for a monthly allowance to women. The state has outstanding liabilities of Rs 3.5 trillion and interest payments of over Rs 36,000 crore. 

 

In Himachal Pradesh, Leader of Opposition Jai Ram Thakur of the BJP accused the state’s Congress government of failing to fulfil several of its manifesto promises, including 300 units of free electricity, purchasing buffalo and cow milk at Rs 100 and Rs 80 per litre, respectively, and Rs 1,500 per month to all women in age group of 18-59 years. “The only achievement of the present Congress government was raising loans amounting to Rs 25,000 crore in 22 months,” Thakur said. In his series of posts on X on Friday, November 2, the PM accused the Congress government in Himachal of delaying salaries to government employees. 

 

In Rajasthan, in its election manifesto for the December 2023 Assembly polls, the BJP promised doubling the Centre's PM Kisan Nidhi allowance to farmers to Rs 12,000. In June, it increased it by Rs 2,000 to Rs 8,000.  

 

In Andhra Pradesh, the N Chandrababu Naidu-led Telugu Desam Party (TDP) government notified a new excise policy on October 1, with the objective of increasing revenue, which would help finance the six welfare schemes that the chief minister had promised before the elections. 

 

While state governments might find their finances in a precarious situation, the race to announce schemes entailing cash transfers and subsidised power is unlikely to end soon as is evident from the slew of promises that the Jharkhand Mukti Morcha-Congress alliance as well as the BJP-led alliance have announced in the run-up to the Jharkhand Assembly polls. With Assembly elections a mere three months away, the Aam Aadmi Party-led Delhi government is also set to roll out, as promised in its Budget for FY 24-25, a monthly stipend of Rs 1,000 for women.