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Maharashtra’s politics had an unusually unstable 5 years. Will its economy pay the cost?

  • Bhavika Jain
  • TIMESOFINDIA.COMUpdated: Sep 30, 2024, 16:23 IST IST

In the past five years, political instability meant governing representatives kept falling back on big announcements and populist plans in a relentless one-upmanship for power. What could this wavering fiscal prudence cost India’s largest economy?

It’s a thin line. Too much political ‘stability’, with unchallenged power in the hands of few people, could lead to cronyism and a stilted economy. And instability, with policies changing too much and too often, could create an uncertainty that could arrest the economy.
In the election-facing state of Maharashtra, the two contenders for power are each wielding one of these arguments to undermine one another. The opposition says continuity is not good — this one last time — because the government is being irresponsible. And the government says continuity is good — this one time — because it needs to see its plans through.
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      In most situations, the government vs opposition (or even internal) wrangling comes down to a net zero because many parties in power behave in similar ways. And populism is a common thread in Indian politics. But in the case of Maharashtra, the stakes are higher because of the scale of the economy itself — a half-a-trillion-dollar economy, India’s largest, with the largest own tax revenue, the country’s biggest FDI inflow, the largest services sector, the second largest industrial sector (having lost the top spot to Gujarat in 2019-20) and the second largest manufacturing sector (also having ceded the top position to Gujarat in 2018-19). medium nocaption113814092 With that context, we ask three questions about the impact of political instability and questionable fiscal prudence on a state that has been India's prized economy, and what the precedent set by other economies within India might tell us.Will Maharashtra be able to sustain its debt?Where else: Karnataka, considered a fiscally prudent state, faced a political upheaval in 2019 much like that of Maharashtra. The government that came in mid-way borrowed heavily, and servicing the debt kept taking up a larger and larger share of the state’s resources — 19% of its expenses were allocated for debt servicing in 2023 — to a point that its ability to compensate people who suffered because of natural calamities was arrested.Between 2018 and 2023, as Karnataka’s political crisis played out, the state added Rs 3 lakh crore of debt between 2018 and 2023 (an average 19% annually). After the 2023 election, when power changed hands again, the new government announced five schemes which would cost the state close to Rs 40,000 crore (which was raised to Rs 52,000 crore this year). While its own ministers asked the government to reconsider its plan and only offer them to the poor, a change which would save the state Rs 10,000 crore a year, the government said it would not stop or alter the schemes.What Maharashtra is doing: The government says the deficit is within limits. Perhaps. At 2.89% of the GDP, its fiscal deficit was less than the 3% threshold the Maharashtra Fiscal Responsibility and Budgetary Management Rules, 2006 asks the government to aim for (or the revised 3.5% threshold in light of the Covid-19 pandemic). But it is still at its highest in at least a decade.A deficit makes sense when it’s directed at spurring economic growth. But within Maharashtra’s spending over the past five years, the share of internal debt has gone from 6% in 2019 to more than 8% now. In this time, the state’s debt has grown an average 12% a year. medium nocaption113814167 When compared with other states, it still remains among the best positioned to keep servicing these debts — its debt-to-GDP ratio is less than 19%, the country’s fourth best. But when debt keeps mounting, larger and larger shares of public money keep getting diverted to repaying debts and leave less “to use productively”, as the latest Comptroller and Auditor General (CAG) report on the state’s finances says. For the latest budget for 2024-25, the state assumes that its massive Rs 61,000-crore debt servicing bill will account for about 9% of its expenses. That’s more than the health, rural development and transport allocations put together.Internal debt is, in fact, one of the three things towards which government spending has veered the most since 2019, the other three being physical assets, pension and social welfare. Unplanned social welfare is what the opposition says is making Maharashtra’s debt soar. But even welfare allocations have to cede space to the necessary debt repayments — the debt servicing allocation is more than the SC-ST-OBC welfare, labour welfare and social welfare allocations put together.Now, those physical assets — infrastructure development — are what the government says made its borrowings go up. The borrowing is likely to increase further, the government has already said, so that infrastructure modernization can be funded. Which takes us to the next question.Are its capital expenditure decisions sound?Where else: Gujarat’s debt has doubled, to Rs 4.7 lakh crore. But it has the resources to service the debt and since it has long prioritised capital expenditure (while being an outlier in how low its social sector spending has been), the focus seems to be prudent. Even then, it could not meet the budgetary allocation for capital expenditure in any year between 2017 and 2022, a CAG report said last year. In fact, the share of capital expenditure in the state’s GDP was dropping even though capital expenditure, in absolute terms, is up. And Gujarat — along with Maharashtra and Karnataka — spent less than half the money they budget for capital expenditure in 2023-24. (While the entrepreneurial space in Gujarat was held up as an example for other states to follow, the state is finding it difficult to retain workers.) Within that capital expenditure, more than Rs 12,000 crore had been spent till 2022-23 on projects which were simply not completed, a CAG report said.What Maharashtra is doing: “The gross state domestic product increases by Rs 2.50 to Rs 3.50 if a rupee is spent on infrastructural facilities,” Maharashtra finance minister Ajit Pawar said during his interim budget speech for 2024-25. Fair enough. And as the latest state economic survey says, Maharashtra’s capital expenditure accounts for 23% of its expenses.Announcements make a bigger splash than actual implementation, which is slow and takes years. It is no different from other states, but the shifts in power in Maharashtra over the past five years meant that the occasions for these “splashes” were more frequent than in a state where a set of people have a steady hold on power for the entire term. (So much so, that when the chief minister says infrastructure projects worth Rs 8 lakh crore are going on in the state, he includes projects which are being executed by the BMC or the MMRDA.One thing to consider is where the capital expenditure is being made. Chief minister Eknath Shinde has been announcing schemes which his own finance department had flagged as problematic. Approving a revised estimate of Rs 37,000 crore for a road project, which the finance and cultural affairs ministers questioned when the estimated cost was still Rs 28,500 crore. Sanctioning Rs 1,000 crore for nine cooperative sugar factories of which seven have been running losses, which the finance department opposed. Clearing more than Rs 60 crore for two cooperative spinning mills that still owe Rs 3,400 crore, which the finance and planning departments advised against. These decisions are very much like the investments whose quality was questioned by the latest CAG report on the state’s finances, saying that capital expenditure in companies and corporations which are loss-making and whose net worth “is completely eroded” is simply not sustainable. Against an average return on investment of 0.02% in statutory corporations, rural banks, joint stock companies and cooperatives, the government paid an average interest rate of 6.6% on its borrowings. medium nocaption113814224 Also, a closer look shows that the spending on capital expenditure has remained under-utilised over the last few years. For instance, in 2022-23, the government allocated about Rs 77,400 crore for capital expenditure, against which actual spending was a little over Rs 66,300 crore — 11% of the budget size. Similarly, in 2021-22, the allocation was Rs 60,700 crore, while actual spending was just Rs 49,100 crore. In 2020-21, the capex was just Rs 32,000 crore, against the provision of Rs 43,800 crore. “Lower spending on capital expenditure means lesser creation of the assets. It also leads to lowering the income and borrowing capacity of the state,” said a former finance department official.Can it keep financing its social welfare plans?Where else: Punjab has the country’s second highest debt-to-GDP ratio at the moment — it has had one of the highest debt pressures since 2018, barring only northeastern debt-riddled states like Arunachal Pradesh and Nagaland. Punjab’s debt crisis was actually well-entrenched as a point of concern by the 1990s, because its fiscal deficit spiralled out of control, its GDP growth slowed down, and its subsidy bills kept mounting. While it kept making larger interest payments (which doubled in the past decade, as it had doubled in the decade before that), Punjab did not reorient its strategy for managing subsidies and welfare schemes. Now, Punjab has an outstanding debt of over Rs 3.7 lakh crore, about 47% of its GDP. Reluctantly, it announced in September 2024 that it was raising fuel prices and withdrawing its power subsidy scheme partially (the subsidy alone would have cost Rs 24,000 crore this financial year). What Maharashtra is doing: When the Maharashtra government tabled (and passed without debate) an unprecedented list of supplementary demands worth almost Rs 95,000 crore for 2024-25, the Rs 25,000 crore set aside for the Mukhyamantri Ladki Bahin Yojana was the decision that seemed to take up the largest space in public discussions.The government said the scheme, which promises Rs 1,500 a month to women between the ages of 21 and 60 years with an annual family income of less than Rs 2.5 lakh, will cost Rs 46,000 crore in a year. And if it comes back to power, it has promised, it will double the amount paid under the scheme. With this, the state’s debt projection shot up to Rs 7.8 lakh crore from Rs 7.11 lakh crore. However, the scheme might simply be a single point on the continuum of spending decisions that focus on a kind of welfare while ignoring others.A series of populist plans have been announced in quick succession. Like a scheme for farmers which promises an honorarium of Rs 12,000 a year under the Namo Shetkari Mahasamman Nidhi. A farm loan waiver. Loan guarantees worth Rs 2,000 crore for co-operatives including sugar and textile — most of them belonging to their leaders — despite co-operative spinning mills owing the state government over Rs 3,400 crore in dues. A reduction in stamp duty on property registration, which the revenue and finance departments did not favour because of the potential Rs 25,000-crore revenue loss. Fuel price cut by reducing state cess on petrol and diesel, which could mean a revenue shortfall of Rs 6,000 crore a year. medium nocaption113814245 The irony is that the series of announcements about welfare schemes went on while the state school education department said recruiting teachers for 67,000 vacancies would be a “financial burden”, college professors were pulled in to teach in schools and were then not paid on time, two lakh contractors went on strike over bills allegedly unpaid by the state government, two lakh anganwadi workers launched another strike for fair pay and not the Rs 10,000 a month they get, and the state transport corporation employees went on strike because their salaries had not been paid.And that’s the point. Increased social sector spending can be a positive metric if it is directed at areas which need state support and if the follow-through is efficient. But underutilization, inefficiencies and delayed projects have often resulted in wastage of resources. In 2022-23, the latest CAG report on Maharashtra’s finances says, there were 16 schemes with a combined approved outlay of almost Rs 7,000 crore which was fully withdrawn through surrender or reappropriation — because the “budgetary allocations were based on unrealistic proposals”. This included schemes meant for emergency supply of drinking water, subsidy for sanitary napkins in rural schools, and grants to villages for road repairs. Announcements and allocations that could have made a difference but went to waste simply because of a gap in planning.","@type":"NewsArticle","mainEntityOfPage":"https://timesofindia.indiatimes.com/india/maharashtras-politics-had-an-unusually-unstable-5-years-will-its-economy-pay-the-cost/articleshow/113806318.cms","inLanguage":"en","headline":"Maharashtra’s politics had an unusually unstable 5 years. 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