Ecowrap Report: States need to reset spending, cut freebies: SBI advisor’s report

What is the News?

State Bank of India’s(SBI) Economic Research Department has released the Ecowrap Report.

What are the key findings of the Ecowrap Report?

States opting for Freebies

Several states in the country are resorting to offering freebies like farm loan waivers and restoring the old pension system.

For instance, Telangana has committed 35% of revenue receipts to finance populist schemes while states like Rajasthan, Chhattisgarh, Andhra Pradesh and others have all committed to spend 5-19% of their revenue receipts on such schemes.

However, these populist schemes are economically unsustainable and a recipe for disaster given the financially bad shape of many states. These schemes also limit states flexibility to spend on development projects.

Moreover, with the GST compensation from the Center ending in June, the states need to re-prioritise expenditure in accordance with the revenue receipts.

Higher Fiscal Deficit of States

The fiscal situation of states has been impacted owing to the COVID-19 pandemic. 

The report notes that for as many as 18 states, the average fiscal deficit (as % of GSDP) has been revised upwards by 50 bps to 4.0% for FY22, with 6 states reporting a fiscal deficit of more than 4% of GSDP.

For example, the fiscal deficit of Bihar (8.3% of GSDP) and Assam (4.5% of GSDP) exceeded their fiscal deficit significantly.

Dichotomy in Growth Numbers

States such as Andhra Pradesh, Assam, Gujarat, Haryana, Maharashtra, Rajasthan, Telangana and West Bengal have shown their real GSDP growth much higher than the overall GDP growth of the country.

However, the report pointed to a dichotomy in the numbers, wondering how the GSDP for 17 states is higher than the growth in the national GDP.

Source: This post is based on the article “States need to reset spending, cut freebies: SBI advisor’s report” published in Business Standard on 18th April 2022.