Post polls, four states, one economic challenge
The clear results of the recent assembly elections – be it the emphatic return of the incumbent in Assam or the ringing out of the old in West Bengal, Tamil Nadu and Kerala — underscore the need for the new governments to urgently address the problems plaguing the economies. The most pressing task is to raise the rate of economic growth. Of the four states, only Assam has done well enough, registering a compound annual growth rate of 11.4 per cent between 2014-15 and 2023-24. Over the same period, Tamil Nadu’s economy expanded by 10.3 per cent while the growth rates of Kerala (8.6 per cent) and West Bengal (9.1 per cent) could not even reach double digits. For perspective, between 2004 and 2026, India’s overall CAGR has been 12.3 per cent. This shows that even Assam could improve and grow much faster, not to mention West Bengal and Kerala, which are effectively dragging back India’s overall growth rate because of their sluggish growth.
Data shows that all the four states are increasingly burdened by debt and rising levels of interest payments. Typically, states are allowed to borrow money but such borrowings are better spent on the creation of productive assets such as roads and ports — the kind of investment that will boost growth and allow the state to pay back the borrowing through higher tax collection in the future. But a look at the revenue deficits shows that be it Kerala, West Bengal orTamil Nadu, all three states have been borrowing money just to pay for their day-to-day expenses such as salaries and pensions. A more recent challenge has been posed by the increase in unconditional cash transfers by state governments. In Assam, 4.3 per cent of revenue receipts go towards such transfers; West Bengal is worst at 10 per cent.
Debt-ridden government finances and slow economic growth are two sides of the same coin. Governments that borrow recklessly to pay for unproductive schemes actively weaken economic growth. The growth rate in per capita GDP — far slower than the growth rates of overall GDP — as well as uncomfortable levels of unemployment are a reflection of the stresses building up in the system. These mandates should be seen as an opportunity to correct the course.
- 1The editorial underscores the critical role of fiscal federalism in India, where states possess significant autonomy in financial management but must adhere to constitutional and statutory guidelines. Uncontrolled state borrowing for unproductive expenses can strain inter-governmental financial relations, potentially leading to central intervention or stricter fiscal discipline measures. The Finance Commission's recommendations are vital in maintaining a balanced fiscal structure and promoting cooperative federalism, ensuring national economic stability amidst diverse state-level economic performances.
- 2The economic performance of individual Indian states, as highlighted in the editorial, significantly impacts India's overall economic narrative and its standing on the global stage. Sluggish growth and mounting debt in key states can deter foreign direct investment, as international investors prioritize stable and robust economic environments. A strong, cohesive national economy, underpinned by fiscally responsible and growing state economies, enhances India's geopolitical influence and its capacity to engage effectively in international trade, projecting an image of reliability and growth.
- 3The article implicitly emphasizes the importance of robust legal and regulatory frameworks, such as the Fiscal Responsibility and Budget Management (FRBM) Act, for ensuring fiscal discipline at the state level. States borrowing excessively for revenue expenditure, rather than capital formation, risk violating these acts and accumulating unsustainable debt. Strict adherence to these regulations and effective enforcement mechanisms are crucial to prevent a debt trap, foster sustainable economic growth, and ensure accountability in public finance, safeguarding the economic future of citizens.
- 4The editorial directly addresses the profound economic and social consequences of slow growth and rising public debt. Prioritizing unproductive spending, such as day-to-day expenses and unconditional cash transfers, over investment in productive assets, leads to slower per capita GDP growth and persistent unemployment. This exacerbates social inequalities and diminishes overall living standards. Sustainable economic policies must focus on strategic investments in infrastructure, education, and healthcare to stimulate inclusive growth and create long-term employment opportunities for the populace.