No state government has returned to power in Rajasthan in the last 25 years. But under Chief Minister Vasundhara Raje, the current Bharatiya Janata Party chief minister, the state has not done very badly.
The growth in gross state domestic product (GSDP) has been steady at around 7 per cent and upwards. And after a faltering on the fiscal deficit front in 2015-16 (FY16) and 2016-17, or FY17, due to the takeover of Rs 390 billion loans of power distribution companies (discoms) under Ujwal Discom Assurance Yojana (UDAY), things are improving. The fiscal deficit in 2017-18 (FY18) was 3.5 per cent, and it is expected to be at 3 per cent in 2018-19 (FY19), which is a remarkable improvement. But it is still higher than the national average of 2.6 per cent.
The state’s other largesse in the past five years has been the rise in expenditure on account of the revision in salaries of government officials and the decision to waive farm loans to the tune of Rs 80 billion. As a result, social and capital spending has been steady but hasn’t seen any remarkable improvement over earlier years.
Impact of UDAY
While the discom debt was earlier guaranteed by the state government, it got converted into an actual liability after the Rs390-billion transfer.
Consequently, the state’s debt rose to 33.6 per cent of GSDP in FY17, from 24.1 per cent in 2014-15.
The fiscal deficit in FY16 was the highest among all states that year, and highest for any big state in the recent past.
Even after removing the fiscal impact of UDAY, since it is ‘quasi-fiscal’ spending as some economists put it, the fiscal deficit stood at 3.4 per cent of GSDP in FY16 and FY17, climbing up marginally to 3.5 per cent in FY18 (Revised Estimate).
According to a study by Pinaki Chakraborty on the impact of UDAY on Rajasthan’s state finances in the Economic and Political Weekly, the state’s fiscal deficit could remain above 4 per cent till 2021-22.
“Though Rajasthan’s finances appeared compliant to the Fiscal Responsibility and Budget Management Act without the power liabilities, UDAY has made it clear that a comprehensive view is necessary to understand the downside fiscal risk arising out of quasi-fiscal activities by states,” the report said. Read more: Rajasthan Assembly Election 2018
As a consequence of this rise in debt burden, interest payments - as a percentage to GSDP - rose from 1.8 per cent in FY16 to as much as 2.3 per cent in FY17 and have remained elevated at similar levels in the FY19 Budget Estimate.
Pay Commission brunt
The state also started paying out higher salaries to government employees, as mandated by the revised Pay Commission rules in October 2017. As a result, the state’s wages and salaries expenditure grew about 30 per cent in FY18 over the previous year. This was faster than the 22 per cent growth in the overall revenue expenditure, according to the Reserve Bank of India report on state finances. And the burden would continue as the stabilisation in salaries after pay revision, and payment of arrears would be over only by 2020-21, says the report.
Limited fiscal space restricts spending
As a direct result of these fiscal pressures, Rajasthan’s capital outlay — the spending on productive assets — declined to Rs 220 billion in FY16 to Rs170 billion in FY17, and improved marginally to Rs 225 billion in FY18.
Capital outlay was 3.2 per cent of GSDP in the UDAY implementation year of FY16. In subsequent years, it went down to 2.2 per cent of GSDP in FY17, and is expected to remain at 2.8 per cent of GSDP in FY19, courtesy interest payments and pay revisions. Even expenditure on health and education has been consistent but hasn’t gone up remarkably.
It would be interesting to see whether the natural propensity to vote against the incumbent government gets triggered by the steady performance of the state government.