Be cautious about debt financing

The Telangana State has unveiled an ambitious budget with increased allocations for its flagship schemes. Notwithstanding a shortfall in the revised estimates for the year 2015-16, the Finance Minister embarked upon a spending spree to take the overall budget to a gigantic size of over Rs 1.3 lakh crore.

The massive budgetary spending is facilitated by the impressive growth the State has achieved ever since its inception. Proving the critics of bifurcation wrong, both the States are on an impressive growth trajectory. Telangana is among the fastest-growing States in India, registering a growth of 11.7 per cent at current prices in 2015-16, much above the national growth performance.

As a result, the State’s tax revenues increased from Rs 43,53,476 lakh in 2015-16 RE to 54,86,990 lakh in 2016-17 BE. However, the fiscal help from Centre was not encouraging as the share of central taxes to the State saw only a modest rise during this period. Thus, the increased budget is to be funded by debt financing.

The budget data reveals that the total outstanding public debt of Telangana State at the time of bifurcation was around 83,845 crore. This shot up abnormally to Rs 1,00,707 crore in 2015-16 RE and further to a whopping Rs 1,23,821 crore in the budget estimates of 2016 -17.

Though this seems to be alarming, one can find reason in the government defence that this debt-induced spending boom is primarily channeled into plan and capital expenditure. This would further accentuate the growth rate, resulting in a spiraling impact of improved incomes for the people and mopped up revenues for the State.

But, the government should be wary of the quality of expenditure, especially, to avoid pilferage. The high allocations for drinking water scheme and welfare programmes are certainly not revenue-generating, though a socially useful expenditure. The Finance Minister’s task, therefore, becomes complex. Accelerating the growth process and revenue mobilisation by an effective expenditure management would be the only option before the ambitious government.

The Socio Economic Outlook for the year 2016 presented to the State legislature along with the budget documents notes that the worrying feature of the recent growth experience has been that of the deceleration in agricultural growth that has been registering a negative growth for the last two years.

As a result, more than half of the population is experiencing reduced incomes. Higher allocations for irrigation and agriculture, therefore, should be welcomed. The agrarian revival requires wide-ranging initiatives apart from higher allocations. The State‘s economic boom is primarily triggered by industry and services that demand policy interventions rather than outlays.

Human development remains a critical challenge in Telangana. The health sector saw improved outlays and significant initiatives. However, the budget is yet to ground the KG-to-PG scheme vital for unleashing the state‘s social development potential.

Meanwhile, irrigation, energy, road connectivity that received momentum have to unleash the State‘s innate growth potential. No Finance Minister can satisfy all the sectors. As he himself underlined in the budget speech, several studies have indicated that good governance matters more than resources for development.