critical analysis of the fiscal health of Indian states.
For a UPSC aspirant, this falls under General Studies Paper III (Indian Economy and issues relating to planning, mobilization of resources, growth, development, and employment).
The Crisis of ‘Freebie Culture’ and Declining State Capital Expenditure
Context
Recent budgetary estimates for the fiscal year 2025-26 reveal a concerning trend in state finances. A significant portion of state revenue—up to 80% in some cases—is being consumed by "committed expenditures" such as salaries, pensions, interest payments, and populist subsidy schemes (freebies). This leaves negligible funds for developmental projects like roads, electricity, and housing.
Key Data Insights (FY 2025-26 Estimates)
According to the report, states are struggling with a shrinking fiscal space for development:
* The Punjab Crisis: Punjab is in the most precarious position, with committed expenses and debt servicing far exceeding its earnings, leading to a negative balance of -72.7%.
* Chhattisgarh Focus: The state spends 66% of its earnings on a combination of freebies/subsidies (32%) and salaries/pensions (34%).
* The Debt Trap: Rajasthan and Punjab face a massive burden of principal repayment. Rajasthan owes ₹1.50 lakh crore, while Punjab owes approximately ₹90,000 crore, forcing them to take new loans just to repay old ones.
* Interest vs. Development: In West Bengal, interest payments (21.2%) have surpassed the combined budget for Education and Health (18.7%).
Analysis of the Impact on Governance
1. Erosion of Capital Expenditure (CapEx)
When 80% of revenue goes toward consumption, the "multiplier effect" of the economy suffers. Money spent on infrastructure (CapEx) creates assets and jobs; money spent on subsidies often provides only short-term relief without long-term productivity.
2. The "Freebie" vs. "Welfare" Debate
The report highlights that schemes like Ladli Behna (MP) and various "guarantee schemes" (Karnataka) are increasing the debt-to-GDP ratio. While welfare is a constitutional mandate, the lack of a "sunset clause" for these subsidies is leading to fiscal profligacy.
3. Stalling of Green Energy and Infrastructure
Due to fiscal constraints, states like Rajasthan are unable to sign Power Purchase Agreements (PPAs), leaving nearly 45 GW of solar and wind energy capacity stalled.
Constitutional and Regulatory Framework
As a UPSC aspirant, you should link this to:
* Article 293: Defines the borrowing powers of States and the role of the Centre in consenting to such loans.
* FRBM Act (Fiscal Responsibility and Budget Management): Most states are struggling to keep their fiscal deficit within the mandated 3% of GSDP.
* 15th Finance Commission Recommendations: Emphasized performance-based incentives and fiscal consolidation for states.
Conclusion and Way Forward
The "side effects" of winning elections through populist measures are now manifesting as a structural economic crisis. To ensure sustainable growth, states must:
* Rationalize Subsidies: Shift from universal subsidies to targeted "Direct Benefit Transfers" (DBT).
* Broaden Tax Base: Enhance Own Tax Revenue (OTR) to reduce dependency on Central transfers.
Source Dainik bhaskar