On July 16, Prime Minister Narendra Modi said, “There are some governments which are indulging in revri culture to secure votes.” Later that month, the Supreme Court admitted a petition which contended that the offer and distribution of “irrational freebies” amounted to “bribery and was unduly influencing voters”. During the hearing, Chief Justice N.V. Ramana said, “We are not just looking at this as just another problem during election time… We are looking at the national economic well-being.”
Mr. Modi’s statement drew criticism from the Opposition. Seeking to be made a party in the ongoing ‘freebies’ case, the DMK argued that the term ‘freebies’ could not be interpreted to restrict States’ competence in providing welfare. Delhi Chief Minister Arvind Kejriwal retorted to the Prime Minister saying that “waiving off friends’ loans worth thousands of crores… were nothing but freebies.”
These exchanges were mostly focused on election-related freebies, which form a minuscule share of the subsidy expenditure. What was missing from the freebie debate was power subsidies, which constitute a significant share of the subsidy expenditure of many States. This is especially the case with States which are relatively more burdened by debt and also spend the most on subsidies. For instance, three States — Rajasthan, Punjab, and Bihar — spend over 80% of their subsidy expenditure on power.
Chart 1 shows the share of subsidy expenditure in four areas — power, food and civil supplies, agriculture, and industries — in the top five States which spent the most on subsidies between FY17 and FY21. The share of subsidy expenditure shown is as of FY21.
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Various types of power subsidies are offered by the States targeting farmers, consumers, and industries. For the purpose of this analysis, all of them have been clubbed under one umbrella term called ‘power subsidies’. For example, Andhra Pradesh offers power subsidies under several heads including ‘free power to SC (Scheduled Caste) households’, ‘reimbursement of electricity charges,’ and ‘Y.S.R Nine Hours Free Power Supply.’
Rajasthan, Punjab, and Bihar are also the States that spend more than 25% of their own tax revenue on subsidies along with Chhattisgarh and Madhya Pradesh. Barring Bihar, all four spend close to 2% of the State Domestic Product on subsidies. The above figures are an average for the five-year period from FY17 to FY21.
All these States are also burdened with high levels of debt. Punjab, specifically, has the highest debt-to-GSDP ratio among the major States in FY22, crossing the 50% mark. The State’s debt has grown by more than 10% points since FY17.
In these five States, in FY22, the debt-to-GSDP ratio was close to or above 30%. Like Punjab, Chhattisgarh too had touched double-digit growth in the debt-to-GSDP ratio. Table 2 lists subsidy expenditure as a share of own tax revenue (OTR) and GSDP between FY17 and FY21 (in %). It also lists the debt-to-GSDP ratio (in %) in FY22* and the change (% points) since FY17.
Among the big spenders, shown in table 3(A), subsidy expenditure dipped in FY20 and FY21. However, this trend got reversed in FY22. Even among States which spent a relatively low share on subsidies, an increasing trend can be observed. Table 3(B) shows that States such as Gujarat, Andhra Pradesh, Jharkhand, and Uttar Pradesh (which feature in the bottom half of table 2) have increased their subsidy expenditure to more than 1% of GSDP. Table 3 (A, B and C) list subsidy expenditure as a share of GSDP (in %) between FY17 and FY22.
More importantly, even in States which are gradually increasing their subsidy expenses, a major chunk of subsidy is devoted to power. For instance, Andhra Pradesh spent 94% of subsidies on power in FY21 ( Chart 4).
In both cases — States which are high subsidy spenders and those which are gradually increasing their spending — power constitutes a dominant chunk of subsidy expenses. It is evident that meaningful intervention on this issue is possible only by addressing the power component of subsidies. Reducing other ‘freebies’ will not bring down the debt levels of the States significantly.
Source: CAG, RBI, MOSPI