Why in news?
The newly elected government of Uttar Pradesh presented its first Budget last week.
What is the major issue?
- Uttar Pradesh was already deeply indebted, with a state debt to state GDP ratio of around 30%.
- But, the BJP led government has promised to waive off large amounts of agricultural debts in its run up to election.
- The loan waiver might cost as much as Rs 36,000 crore.
- Further, the Union Finance Minister has specifically said that the central government would not pay for the loan waiver.
How does the budget propose to manage this burden?
- The budget says, the extra spending will be managed through two changes from the interim Budget presented earlier.
- First, the government has reduced its power allocation by Rs 16,800 crore.
- And second, total revenue is projected to increase by 18.6 per cent over the previous year.
- It turns out that much of this increase will, in fact, be through grants from the Centre, regardless of Finance Minister’s assurances.
- According to the Uttar Pradesh Budget, grants from the Centre will grow by an unusually large 39 per cent to Rs 68,000 crore.
- If for some reason that largesse from the central government does not materialise, then the state’s fiscal deficit will only rise.
Is the problem unique to U.P.?
- Other states that have promised farm loan waivers will have similar problems in raising revenue while meeting their fiscal targets.
- State-level finances were already showing signs of serious strain.
- The pressure is growing on other states across the country to meet demands from farmers under stress after two consecutive droughts followed by demonetisation.
- For the first time in a decade, the ratio of gross state fiscal deficits to their GDP crossed the 3% threshold to hit 3.6%.
- The RBI reporton state finances also warned that, aside from loan waivers, state finances would suffer from the implementation of 7thPay Commission recommendations.
- States would also suffer from the revenue uncertainty associated with the implementation of the goods and services tax.
- Because of this, the capital expenditure might suffer, particularly expenditure targeted towards the agricultural sector, which has faced underinvestment for years.
Source: Business Standard
