SBI Report Warns Of Freebies Time-Bomb, Urges Supreme Court To Cap Such Spends At 1% Of State GDP

With states after states competing to offer freebies, a report has suggested that the Supreme Court-led panel could cap such welfare schemes at 1% of the state's GDP or 1% of its own tax collection.

Citing the examples of just three states, a report penned by Soumya Kanti Ghosh, the group chief economic adviser to State Bank of India, said annual pension liabilities of the poor states of Chhattisgarh, Jharkhand and Rajasthan are estimated at Rs 3 lakh crore.

When looked in relation to these states own tax revenue, pension liabilities are quite high for Jharkhand, Rajasthan and Chhattisgarh at 217, 190 and 207% respectively.

While for states contemplating the change, it would be as high as 450% of own tax revenue in case of Himachal Pradesh, 138% of own tax revenue in case of Gujarat and 242% of own tax revenue for Punjab, which is also planning to revert to the old pension system wherein the beneficiaries pay nothing.

Ghosh also points out that according to the latest available information, the off-budget borrowings of states, which are loans raised by state-owned entities and guaranteed by the states, have reached around 4.5% of GDP in 2022 and the extent of such guarantees have achieved significant proportion of GDP for various states.

The report suggests that the apex court panel fix a band, say 1% of GSDP or 1% of state own tax collections or 1% of state revenue expenditure for these welfare schemes, he says.

Such guarantee amount is significant at 11.7% of GDP for Telangana, 10.8% for Sikkim, 9.8% for Andhra, 7.1 per cent for Rajasthan, and 6.3% for Uttar Pradesh. While the power sector accounts for almost 40% of these guarantees, other beneficiaries include sectors like irrigation, infrastructure development, food and water supply.

On the cost of the election promises made by various political parties in the poll-bound states as percentage of revenue receipts and own tax revenue of these states it is 1-3 and 2-10 in Himachal 5-8, and 8-13 in Gujarat respectively.

The unfunded pension liabilities of the state which have gone back to the old pension scheme or pay as you go scheme, or planning to do so as percentage of own tax revenue, it's a staggering 450 for Himachal, 138 for Gujarat, 207 for Chhattisgarh, 190 for Rajasthan, 217 for Jharkhand and 242 for Punjab.

The combined liabilities of the states which have reverted to the old pension scheme/or have promised to do so stood at Rs 3,45,505 crore in FY20 and the same will go up as percentage of GSDP of Chattisgarh to 1.9 and and incremental burden of 60,000 crore from Rs 6,638 crore in FY20.

For Jharkhand it was Rs 6,005 crore and will be 1.7% of GSDP and will increase by Rs 54,000 crore; Rajasthan Rs 20,761 core, 6% and will jump by Rs 1.87 lakh crore;  Punjab — Rs 10,294 crore, 3% and will rise by Rs 92,000 crore, Himachal—Rs 5,490 crore, 1.6% of GDP and will rise by 1.59 lakh crore.

When the freebies announced by the states in FY23 are compared to percentage of the each of the state's GDP and revenue receipts and own tax revenue, they are more staggering.

Quoting from a recent RBI paper on financial assistance/cash transfers, utility subsidies, loan or fee waivers and interest free loans announced by the states in their latest budgets, estimate expenditure on freebies range from 0.1-2.7% of GSDP for different states. The freebies have exceeded 2% of GSDP for some of the highly indebted states such as Andhra and Punjab.