States’ vast freebies impacting credit profiles

Mumbai: Top Indian states’ spending on social welfare is set to touch a 10-year high of Rs4 lakh crore, or 1.7 per cent of their combined GSDP, in the ongoing fiscal, a domestic rating agency said in a report on Wednesday.

Crisil Director Aditya Jhaver advocated for higher capex allocation towards education and health, saying “it has a relatively higher impact on uplifting revenue and productivity for states in the near- to medium-term.”

“While allocation towards social welfare schemes is seen essential considering India’s demography, a steady increase in the same without commensurate increase in revenues may have an impact the credit profiles of the states in the longer run,” Crisil warned.

After analysing budgets of top-11 States, which account for over three-fourths of the aggregate Gross State Domestic Product (GSDP), Crisil Ratings said the growth in social welfare schemes is expected to clock a 16 per cent jump in compounded annual growth rate between 2017-18 and 2023-24. The revenue receipts grew by 11 per cent during the same period, Crisil said. Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, Andhra Pradesh and Kerala were the 11 states accounted for in the Crisil report.

The agency said these spends were 1.2-1.3 per cent of GSDP on an average before FY18, which has now gone up to 1.7 per cent.

“The higher growth on social welfare schemes is due to states prioritising financial assistance to certain target demographics in the form of direct transfers, pensions and cash incentives, and, in some instances, to honour election commitments,” said Anuj Sethi, sr director at Crisil.

Prime Minister Narendra Modi last year slammed freebies, terming it as the ‘revdi culture’, and underlined the need to end the same.

Crisil said ‘social welfare’ spending does not include expenditure on education, agriculture, public health and other key sectors, which are budgeted separately. Among the non-committed expenditure items, social welfare schemes have the highest share at 13 per cent of the overall amount, the agency said, adding that such spending is higher than education (10-11 per cent), power (6-7 per cent), agriculture (6-7 per cent) and public health (4-5 per cent).

It said the share of social welfare schemes in the non-committed expenditure stood at 10 per cent in FY18. The growth in expenditure on social welfare schemes at 16 per cent per annum is higher than the 12-13 per cent growth in expenditure on healthcare between FY18 and FY24, which witnessed the Covid-19 pandemic, the agency said.

Revenue receipts have grown at a moderate 10-11 per cent per annum between FY18 and FY24, resulting in continuing revenue deficits for the states, the agency said.