People in the mountainous state of Himachal Pradesh and future state governments will watch with despair the works of the outgoing Bharatiya Janata Party (BJP) government. He leaves behind a mountain of debt that has been valued at Rs.74,686 crore in the budget for the current financial year.
In the last five years of BJP rule under Chief Minister Jai Ram Thakur, government debt has increased by 58%. (see table below) This means that every resident of Himachal Pradesh – from newborns to elderly people – now has an over-indebtedness of more than Rs1 lakh on their head.
Note that this is just state government debt: the BJP-led central government has, for its part, followed a similar policy of massive borrowing, so much so that the total government debt central in June 2022 was estimated at just over 141 rupees. lakh crore, according to a quarterly report by the Union Ministry of Finance.
Also note that these are figures for outstanding liabilities and do not include state government guarantees. When state-owned public sector enterprises borrow money from financial institutions, the state government guarantees that it will repay the loans in the event of default.
According to state budget documents cited by PRS India, a non-profit legislative research organization, at the end of 2020-21 Himachal Pradesh’s outstanding guarantee was estimated at 1.37% of the GSDP (gross domestic product of the state), with increases in guarantee levels in the electricity sector and the national electricity board.
The future is in jeopardy
Currently, in the fiscal year 2022-23, the total state government debt is approximately 40.49% of GSDP. It’s a record. Government debt is projected to continue at a slightly lower level in coming years with debt in 2025-26 projected at 39.49% of GSDP, according to PRS.
This means that this debt is unlikely to disappear soon. Indeed, the loans must be repaid over a certain period and, in the meantime, other loans can accumulate. Thus, future generations will continue to repay the debt contracted today.
Interest payments continue each year. According to budget documents, debt repayment consumed Rs 4,387 crore in 2020-21 and is expected to consume another Rs 5,342 crore in the current financial year.
Where does the loan come from?
It is instructive to see where the HP government borrowed all this money from. Depending on the break available with the Reserve Bank of India database, at the end of March 2020, the government debt was 62,218.4 crore rupees, of which the internal debt was 39,527.8 crore rupees. This internal debt consists mainly of market borrowing through State Development Loans (SDLs), which are bonds issued by state governments, under central government regulation. HP’s SDL stood at Rs.28,142.2 crore in the example above for 2019-20. In other words, SDLs accounted for about 71% of internal debt and about 45% of total debt. These loans are therefore determined by commercial interest rates and come with strict repayment schedules.
Another major source of borrowing is the Provident Fund from which the Himachal government had taken Rs. 15,537 crore, or almost 25% of its borrowings. Loans were also taken out from the National Small Savings Fund (NSSF), NABARD and various insurance companies.
Lackluster budget performance
Some will say that there is no harm in taking out loans if the money is used for the benefit of the people. In fact, market loans are often needed to expand production capacity or finance infrastructure. But a look at the performance of the HP government shows that these loans aren’t really funding a booming economy. Rather, these are simply used to keep the state government afloat.
In fact, like the the table below shows, the BJP government has been unable to spend even the funds that have been allocated to several major spending items. Data are for 2020-21, the latest year for which actual expenditure figures are available.
In several key sectors, such as education, rural development, health, agriculture and water supply – all hot issues in the state – spending was below the allocated amount. It was the year of the pandemic and the focus should have been on giving maximum help to people struggling with the onslaught of the Covid pandemic. Even in the health sector, spending was 16% lower!
Clearly, the BJP government only borrowed heavily to allow a weak fiscal regime to continue and mismanaged the finances so drastically that it ended up not even spending the allocated funds.
HP has one of the lowest tax to GSDP ratios and the main sources of own tax revenue are SGST and excise. Here, the central government’s scheme to not make timely Goods and Services Tax (GST) payments to the states kicked in and forced the state (like many others) to opt for commercial loans.
In sum, the performance of the BJP-led state government leaves much to be desired and it is no surprise that in the ongoing election campaign for the state assembly it is facing discontent and severe anger on the part of the electorate.