Photo source: The Indian Express

The Indian Express published an article on October 6 titled "The Fiscal Condition in India's States Is the Same: Fiscally Vulnerable, with Expanding Welfare." The article argues that India's entire welfare system is built on a fragile fiscal foundation, and all states face a significant paradox of "increasing fiscal vulnerability" and "expanding welfare coverage," which poses a serious challenge to India's future economic sustainability. The author of this article, Deepanshu Mohan, is a professor at the Krea University, K. R. Narayanan School of Humanities and Social Sciences, and Aditi Lazarus and Geetaali Malhotra are research analysts at the Krea University Center for New Economics.

In recent years, accumulated debt from the pandemic and insufficient fiscal revenue have pushed Indian states into a "borrowing to cover deficits" fiscal model. A report by the Comptroller and Auditor General (CAG) of India shows that states often compensate for deficit gaps by increasing loans and issuing bonds, leading to a steady rise in public debt. During the pandemic, sharp revenue declines combined with surging emergency expenditures caused almost all states to resort to "record-breaking borrowing," laying the groundwork for future fiscal fragility. Fundamentally, this is an inevitable outcome of expanding welfare expenditure demands without matching fiscal capacity.

Overall, the fiscal conditions of Indian states vary significantly, but they share the same fundamental problem. "Large states" are characterized by vast territories and multiple governance responsibilities. With diverse economic sizes, large states are both pillars of national economic growth and operators of large-scale welfare systems, and their fiscal fluctuations can have nationwide effects. In the 2022-23 fiscal year, Maharashtra's internal revenue accounted for nearly 70% of its total revenue, demonstrating its strong ability to mobilize income. However, some large states rely on "non-sustainable income sources," which may not be able to support welfare spending in the long term, causing long-term economic negative impacts. For example, Kerala's lottery revenue is close to 120 billion rupees (Rs 12,000 crore).

By comparison, the fiscal conditions of "small states" are more constrained by geographical conditions and economic size. Factors such as mountainous terrain, scattered settlements, and a narrow economic base lead to high costs in delivering public services and limited income mobilization capabilities. In the 2022-23 fiscal year, the proportion of own taxes in Uttarakhand's total revenue was only 34.8%, while in Puducherry it was as low as 9.4%, and most small northeastern states had ratios below 20%, heavily relying on central government transfers. Additionally, small states have a lower threshold for fiscal vulnerability; even small amounts of borrowing can increase the debt-to-GSDP ratio, which in large states might be considered a "normal level," but in small states reaches an "alert level."

Looking specifically at state debt performance, there is clear differentiation in the scale of borrowing and debt ratios among different states, but the essence of fragility remains unchanged. Among small states, Assam's borrowing increased from 39.02 billion rupees (Rs 3,902 crore) in the 2016-17 fiscal year to 282.7 billion rupees (Rs 28,270 crore) in the 2022-23 fiscal year, with the debt ratio rising to about 28.5% in 2023. Furthermore, some small states have attempted to reduce borrowing. For example, after the pandemic, Assam reduced its borrowing from 76.55 billion rupees (7,655 crore) in the 2020-21 fiscal year to 26.28 billion rupees (Rs 2,628 crore) in the 2022-23 fiscal year, keeping the debt ratio below 30%. However, due to their small economic size, Tripura, despite reducing its borrowing to 8.77 billion rupees (Rs 877 crore), still has a debt ratio above 30%.

The debt performance of large states is also differentiated. For instance, Andhra Pradesh's borrowing has continued to expand, increasing from 599.23 billion rupees (Rs 59,923 crore) in the 2016-17 fiscal year to 1.86024 trillion rupees (Rs 1,86,024 crore) in the 2022-23 fiscal year, with a debt ratio of approximately 33.1%. Additionally, some large states have tried to "de-leverage" after the pandemic. For example, Odisha managed to keep its borrowing at 534.7 billion rupees (Rs 5,347 crore) through revenue surpluses and active constraints, resulting in a debt ratio of 19.5%. However, Punjab has fallen into a cycle of "volatile borrowing and high debt," maintaining a debt ratio of 47.1% for a long time, becoming a typical case of "chronic fiscal pressure."

Although many states' financial statements show balance or surplus, their actual condition is highly dependent on government transfers, off-budget loans, and deferred liabilities, with welfare goals consistently exceeding state fiscal capacity. For instance, Punjab's debt has reached an "unsustainable level," Kerala excessively relies on lottery revenue to fill welfare gaps, and Andhra Pradesh and Uttar Pradesh provide funding for agricultural loan waivers, free electricity, and other benefits through government guarantees and special purpose vehicles, with these costs not included in the national accounts. Therefore, India's economic structure presents a situation where "welfare coverage is extensive, but the fiscal foundation is extremely fragile," leading to the fact that state-level welfare protection is barely maintained on the edge of resource scarcity, and posing a serious challenge to India's future fiscal sustainability.

Original article: https://www.toutiao.com/article/7559632975508308495/

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