Indian states are going BANKRUPT...

The fiscal condition of the most indebted states in India may deteriorate even further situation of almost all of our states is not very skill condition is not very satisfactory. States like Bihar, Kerala, and Punjab most stressed states and it also points to the dangers of the past that the streets are spreading in terms of calling share of the states’ own revenue.

On the 11th of June 2022, the reserve bank of India released a vital document about the economy of the States of India. Some of our Indian states have been managing their finances so bad that these states could be heading towards the same state as Sri Lanka's economy!! And we all know what's happening in Sri Lanka right now. this unrest is Sri Lanka’s worsening economic crisis inflation is currently at 55%. The protests come amid the country’s financial crisis which now follows incredible scenes in the capital as thousands of protesters stormed the presidential palace the worst part is that if this continues for a long time the entire country of India will lose money and could face another economic crisis.

The question is why the RBI document combines Indian states with the economic crisis in Sri Lanka.

How are these states making the same mistakes as the Sri Lankan government?

If we look closely at the Srilanka economic crisis it’s because of THREE reasons:

1. They spent 27 years into fighting a civil war that emptied their coffers and repelled foreign investments.
2. They did not diversify their export and were heavily relying on plantation and tourism.
3. They took a lot of debt and channelized it towards economically unviable welfare schemes eventually their DEBT-GDP RATIO went for a loss of 110 and now the country is in a pathetic state and just like this dead GDP RATIO used to check the financial health of countries, for States, there is a Metrics called DEBT TO GSDP RATIO. This is nothing but the ratio of the debt of the State vs the Gross State Domestic Product or GDP of the State. This ratio is ideally supposed to be around 20 but as per RBI states like Maharashtra, Orissa, and Gujarat stand at less than 20%. States like Bihar, Punjab, Rajasthan, Kerala, and UP have the worst debt percentage with Punjab and Rajasthan standing at a disastrous 53.3% and 39.5% and what’s even worse is that Punjab spent 21.3% of its revenue on just interest payments.

Now the question is why are these metrics so bad and what are these low-performing states doing that is actually pulling them down?

Well just like Sri Lanka even these states are ruling out unviable subsidies and freebies for either getting votes or simply pleasing the people. The worst part is that if they are in power, they could easily use the state budget instead of the party funds to please the people, and according to the RBI document it has raised concerns about THREE such policies:

1)?????The Pension Expenditure:

States are adopting OLD PENSION SCHEME rather than NEW PENSION SCHEME which give a big burden on the economy of the country. The New Penson Scheme has three significant benefits that the government expected to achieve:

1.??????From 2009 onwards, not just government employees but anyone could contribute to the fund, so a lot of money was actually being used by the government and private companies to do business and generate profit

2.??????The money that is acting as a pension is not coming directly from the government but through the return generated by the funds in the market.

3.??????Instead of a fixed return the return is based on market conditions so the government does not have to take the risk of giving out pensions even during bad market conditions.

But guess what now that election is scheduled for next year in Rajasthan, the government of Rajasthan actually decided to come up with a people-pleasing policy. So, the increasing number of freebies that have been given by the states and two particular states, Rajasthan and Chhattisgarh, have gone back to the OLD PENSION SCHEME.

Note: Rajasthan spends Rs 23,000 crores on pension and Rs 60,293 crores on salaries and wages. This constitutes 56% of its own tax and non-tax revenues.

So, if the Old Pension Scheme is executed in the long run the people will definitely be happy, and the politicians will be happy because they will get votes, but in the long run, the people of Rajasthan will be severely affected because the financial of the government will be used more for pensions and salaries, instead of development and actual welfare. And now Rajasthan has brought the Old Pension Scheme back even Chhattisgarh has done the same and the leaders of other states are also becoming motivated to reverse the National Pension Scheme. And this is all being done right ahead of the election and this is why this policy is considered a Physical Disaster and the RBI has raised concerns about it.

2)?????The losses are written by the government-owned Power distribution companies or DISCOMS. Unfortunately, the existing DISCOMS don’t use good transmission technology because of which 20% of the power produced in India is lost during transmission itself and metering systems are too outdated to actually build the customers properly.

Note: DISCOMS has accumulated losses of over Rs 5 lakh crore and regulatory assets, which represent costs that are deferred for recovery through future tariff revisions, worth Rs 1.25 lakh crore.

In 2015 government launched UDAY SCHEME whereby state governments were asked to take 75% of the outstanding liabilities of DISCOMS in the form of grants or equities and this further stretched their finances. so, RBI says if these states decide to bail out these government power distribution companies then it's going to further induce train on their already stretched balance sheet and if this continues again, we are not far from Srilanka's condition where power shortage has completely disrupted the lives of the citizens.

3)?????UNVIABLE SUBSIDIES AND UNNECESSARY FREEBIES:

For example, in Punjab, the govt is offering FREE ELECTRICITY UOTO 300 UNITS to every household and is even waving off electricity bills which are said to cause the govt Rs 5,000 crores and on top of that, if the government does what Mr. Kejriwal promised which is giving Rs 1000 per month/woman who’s above the age 18, it would cause the state Rs 15,000 crores.

According to RBI Andra Pradesh govt. which is offering Rs 15,000 as financial aid to every poor mother who sends her children to school and this caused the govt more than Rs 6500 crores together according to RBI the Andra Pradesh govt is set to spend Rs 27,541 crores on welfare schemes.

In Uttar Pradesh, the govt promised free gas cylinders if people vote for BJP.

In Madhya Pradesh, the electricity subsidy to farmers and domestic users alone is said to cause the state Rs 21,000 crores and the list continues for most the states. The overall economics of the states taking a back seat while politics takes the centre stage and this is very dangerous. Out of all these subsidies or freebies, it’s still not very clear as to how many of them are said to generate a tangible return for the economy of the state.

What scares RBI is that these states are taking more and more grants from the state while they’re recklessly spending the on people-pleasing policies and welfarism and if this continues for a long time the cost of today’s subsidy will be borne by the same people with INFLATION and food and fuel shortage in the future.