15/09/2024

Uttarakhand’s Fiscal Responsibility: Lessons from Himachal Pradesh’s Fiscal Challenges

The report of Business Standard on 8th September 2024, highlights Himachal Pradesh’s economic distress which can be attributed largely to heavy borrowing, rising pension and salary budgets, the provision of freebies, and insufficient revenue generation. At Rs 1.17 lakh, Himachal Pradesh has the highest per capita debt in the country after Arunachal Pradesh. The report mentions that Himachal’s debt has surged from 37% to 42.5% of GSDP in just 3 years and revenue expenditure accounts for 90% of the spending and more than 57% of revenue receipts are committed to salaries, pensions, and interest payments?(PRS Legislative Research). The state struggles with low revenue generation and high subsidy costs. However, now state is considering rolling back of subsidies to improve finances but can it be fruitful now without broader fiscal reforms?

This attracts sparking political tension between the Congress and BJP.  However, this is not a political concern but a bigger issue of state’s sustainable development, well-being of the citizens and long-term economic stability of state.

Similarly, Uttarakhand is another neighbouring Himalayan states which not only shares geographical proximity but also similar economic structures and developmental aspirations. However, Himachal Pradesh's recent fiscal distress serves as a cautionary tale for Uttarakhand and it is imperative for Uttarakhand to critically assess its fiscal health and take proactive measures to avoid a similar crisis.

While its debt-to-GSDP ratio of 29.1% is lower than Himachal Pradesh’s alarming 37%, it is still a cause for concern. The state’s primary fiscal challenges include growing expenditure on salaries and pensions, sluggish revenue growth, and an overreliance on central grants and borrowing to fund key infrastructure projects. This could jeopardize its financial stability if not addressed promptly. 

Challenges for Uttarakhand –

  1. Rising Debt Levels
    • Debt-to-GSDP Ratio: Uttarakhand's debt-to-Gross State Domestic Product (GSDP) ratio has been on an upward trend. As of 2022-23, the ratio stood at approximately 29.1%, up from 25.2% in 2018-19 (Reserve Bank of India, 2023). While this is lower than Himachal's 37%, the increasing trajectory is a concern.
    • Outstanding Liabilities: The state's outstanding liabilities have escalated to around INR 60,000 crores in 2022-23, a significant increase from INR 45,000 crores in 2018-19 (Uttarakhand State Budget Documents, 2023).
    • Interest Payments: Interest payments are consuming a growing share of the state's revenue. In 2022-23, interest payments accounted for 12% of the revenue expenditure, limiting the fiscal space for developmental spending (Comptroller and Auditor General of India, 2023).
  2. High Revenue Expenditure
    • Salaries and Pensions: With 13% of the state’s revenue receipts going to pensions and 33% to salaries in FY 2023-24, Uttarakhand faces the challenge of managing rising liabilities as its public sector workforce ages?(PRS Legislative Research). Similar to Himachal Pradesh, Uttarakhand’s rising pension commitments could severely restrict future fiscal flexibility.
  3. Limited Revenue Generation Capacity
    • Tax Revenues: The state's own tax revenues are insufficient to meet its expenditure needs. In 2022-23, Uttarakhand's own tax revenue was approximately INR 18,000 crores, covering only about 50% of its revenue expenditure (State Budget Documents, 2023).
    • Dependence on Central Transfers: The state relies heavily on central government transfers, which make up about 40% of its revenue receipts. Any fluctuation in central allocations can significantly impact the state's finances (Finance Commission Reports, 2021).
  4. Pressure to Implement Populist Schemes
    • Subsidies and Freebies: Political pressures are mounting to introduce populist schemes such as free electricity, water, and other subsidies. While these may provide short-term relief to citizens, they can strain the state's finances if not managed sustainably.
    • Comparative Populism: Observing neighbouring states offering generous freebies creates expectations among Uttarakhand's populace, increasing pressure on the government to follow suit.
  5. Natural Disasters and Environmental Vulnerabilities
    • Disaster Relief Expenditure: Uttarakhand is prone to natural disasters like floods and landslides, requiring substantial funds for relief and rehabilitation. In 2021-22, the state spent over INR 2,500 crores on disaster management (Uttarakhand Disaster Management Authority, 2022).
    • Climate Change Impact: The increasing frequency of natural calamities due to climate change adds unexpected financial burdens, diverting resources from planned developmental activities.
  6. Infrastructure Development Needs
    • Capital Expenditure Demands: To stimulate economic growth and improve connectivity, significant investments in infrastructure are required. Balancing these capital expenditures with fiscal prudence is challenging.
  7. Economic Impact of COVID-19
    • Revenue Shortfalls: The pandemic led to decreased economic activity, resulting in lower tax collections and increased expenditure on health and welfare measures.
    • Increased Social Expenditure: Additional funds were allocated for healthcare infrastructure and social security schemes, further straining the budget. 
Actionable Steps for Uttarakhand
  1. Debt Management - Uttarakhand should prioritise reducing its debt-to-GSDP ratio by adhering strictly to the Fiscal Responsibility and Budget Management (FRBM) Act. Debt restructuring, refinancing, and prudent borrowing practices can help control rising liabilities
  2. Pension Reforms - Transitioning new government employees to contributory pension schemes, such as the National Pension System (NPS), would help reduce long-term pension liabilities. This would bring Uttarakhand in line with other states that have successfully adopted NPS to manage pension costs (PRS Legislative Research).
  3. Revenue Enhancement - To reduce dependence on central transfers, Uttarakhand should focus on expanding its revenue base by investing in high-potential sectors such as tourism, renewable energy, and pharmaceuticals. Sustainable tourism initiatives, in particular, can provide a stable revenue stream without damaging the environment (PRS Legislative Research).
  4. Expenditure Rationalisation - Uttarakhand must control its non-essential expenditures and focus on outcome-based budgeting to ensure that every rupee spent delivers maximum impact. By rationalising its expenditure, the state can free up resources for development while maintaining fiscal discipline.
  5. Public-Private Partnerships (PPP) - Leveraging PPP models can reduce the fiscal burden of infrastructure projects while tapping into private sector innovation. This approach would be especially effective in tourism and energy, sectors where Uttarakhand has a comparative advantage.
  6. Disaster Risk Financing - Establishing a contingency fund for disaster relief and exploring insurance mechanisms for disaster risk management will help Uttarakhand cope with the financial impact of frequent natural disasters without derailing the budget
Himachal Pradesh’s fiscal crisis, driven by unchecked borrowing, rising pension liabilities, and unsustainable populist schemes, serves as a cautionary tale for Uttarakhand. While Uttarakhand’s fiscal health is currently more stable, the state is showing similar warning signs. By focusing on debt management, pension reforms, revenue enhancement, and expenditure rationalisation, Uttarakhand can avoid a fiscal crisis and ensure long-term financial sustainability. It is imperative for policymakers to take proactive steps now to secure Uttarakhand’s future and set an example for other states in responsible fiscal governance. 

References:
  • Business Standard. (2024). Himachal Pradesh’s financial crisis brewing for some time amid high debt burden? (Business Standard)
  • PRS Legislative Research. (2023). Uttarakhand Budget Analysis?(PRS Legislative Research)?(PRS Legislative Research).
  • Reserve Bank of India. (2023). State Finances: A Study of Budgets 2022-23.  


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