The slew of freebies being announced by state governments such as Maharashtra ahead of assembly elections could squeeze their capital expenditure even though fiscal deficit remains in check.
The Election Commission of India on Tuesday announced that voting for the assembly election in Maharashtra will take place in a single phase on November 20 and the results will be announced on November 23.
In the run up to the elections, the Eknath Shinde-led government in Maharashtra has gone all out to woo voters. On October 14, it announced a complete toll waiver for light motor vehicles at all five toll booths in Mumbai. Prior to that, it had announced several other freebies in the Budget such as the Mukhyamantri Majhi Ladki Bahin Yojana scheme with a monthly payment of Rs 1,500 to eligible women aged between 21 and 60 as well as three free LPG cylinders and free electricity for agriculture pumps up to 7.5 horse power capacity that would benefit 4.4 million farmers.
Maharashtra is not the only state to go out of its way to entice voters. Analysts and experts have time and again highlighted the perils of such pre-election fiscal spending. “The combined fiscal deficit of states is unlikely to breach the 3% limit but such expenditure on the revenue account will limit the state’s capacity to spend on capital expenditure. Ultimately, this will hurt the state’s finances,” noted a policy watcher.
A recent report by Emkay Global Financial Services had noted that of the 10 major states to go to polls in 2023 and 2024, nearly every state has introduced new freebie schemes, regardless of the party in power. While this is not a completely new phenomenon, it had warned that the current cycle is “unprecedented and could lead to fiscal slippage”.
Six states—Maharashtra, Madhya Pradesh, Rajasthan, Telangana, Tamil Nadu and Odisha—have announced revised FY25 Budgets after the general elections, with Andhra Pradesh’s Budget expected soon. “These six states have increased their fiscal deficit to GSDP targets (except Telangana), by an average of 0.3% of GSDP. Odisha has the highest increase (0.6% of GSDP), while Telangana has lowered its target by 0.2%/GSDP,” it had noted.
Maharashtra had presented an Interim Budget 2024-25 in February and it was followed up by the full Budget on June 28. While the Interim Budget had pegged the state’s fiscal deficit at 2.3% for FY25, the full Budget raised it to 2.6%. The Emkay report noted that this increase was entirely due to higher revenue expenditure, which was now budgeted to rise 18% year on year.
Populist schemes were allocated Rs 96,000 crore for FY25, amounting to 2.2% of GSDP and 19% of revenue receipts. “With committed expenditure (salaries, pension, and interest payments) already accounting for 55% of revenue, only 26% of revenue is available for discretionary spending, including capex. Maharashtra’s capex is already relatively low, and this will further dampen it,” it warned.
With the state’s FY25 revenue estimates staying virtually unchanged, it will likely need to tap market borrowings heavily to fund this splurge, with heavier borrowings likely in the fourth quarter of the fiscal.
India Ratings and Research had also noted that the deficit ratios of Maharashtra are likely to come in higher than the budget estimate (BE) in FY25, largely due to the increased allocation towards welfare spending. As per the FY25 budget, the fiscal deficit is estimated at 2.6% of gross state domestic product (GSDP) while the revenue deficit is budgeted at 0.5% for FY25.
“The state government has budgeted a revenue deficit of Rs 20,500 crore, which is 0.5% of GSDP for FY25. With additional funds earmarked for women welfare schemes such as Rs 25,000 crore for the Mukhyamantri Majhi Ladki Bahin Yojana, Rs 6,056 towards skill development, Rs 4,317 crore towards social justice, Rs 4,185 crore towards public health and allocation towards other welfare measures, the revenue deficit would be 1.3% of GSDP in FY25,” it had said in a report when the state Budget was announced, adding that correspondingly, the fiscal deficit is likely to come in higher.