Rajasthan’s free power offer set to worsen its stressed fiscal position

Rajasthan Chief Minister Ashok Gehlot cast a wide net with his budget announcements.

The Rajasthan government’s announcement this week that it will lower power bills for households may help the Congress party garner votes in the assembly elections due later this year. However, this latest dole will worsen the stress on the state’s economy, an analysis of its finances showed.

Chief Minister Ashok Gehlot had proposed in his budget in February that he would make electricity up to 100 units each month free for consumers, up from 50 units earlier. This week, he said that from May 1, the bill for consumers who use up to 100 units of electricity per month will be zero. For those consuming above 100 units, the first 100 units will remain free, irrespective of the overall usage. Moreover, consumers using up to 200 units of power per month will be incentivised by waiving costs like fixed charge and fuel surcharge for consumption between 100 and 200 units per month, the government said.

The budget promise of free electricity to consumers with a consumption of 100 units per month, which was expected to benefit more than 1.04 crore out of 1.19 crore families in the state, was expected to cost the state exchequer Rs 7,000 crore, according to budget documents.

With a budget size of Rs 3.91 lakh crore for 2023-24, the state can afford to spend the additional cost of subsidising power for more consumers.

However, this move is not risk-free, as far as its financial position is concerned.

Budget promises
Gehlot cast a wide net with his budget announcements. A so-called inflation relief package worth more than Rs 19,000 crore, included tax reduction on fuels, subsidised cooking gas cylinders and free food packets, apart from free domestic electricity. Gas cylinders at Rs 500 are expected to benefit 76 lakh families while free ration will be provided to 1 crore families.

The budget also announced an employment guarantee scheme for 125 days per year, economic assistance for gig workers and compensation for deaths of cows on account of lumpy disease.

Finances in dire straits
While it is easy to promise and deliver doles, it is difficult to take them away. The budget is already in a rather worrisome state, despite some recent improvement from the pandemic depths.

Historically, Rajasthan has been one of the poorer performers in India, if one looks at the fiscal situation.

During 2011- 12 to 2019-20, the state incurred an average fiscal deficit of above 3.5 percent of gross state domestic product, while the national average was 2.5 percent and the Fiscal Responsibility Legislation ceiling was 3 percent, according to an article by Reserve Bank of India (RBI) staff published in June last year.

In fact, the RBI paper identified Rajasthan as the one of the 10 states with the highest debt burden based on data for 2022-21.

It was also singled out for its poor expenditure quality, spending around 90 percent in revenue accounts.

“Rajasthan, Kerala and West Bengal are projected to exceed the debt-gross state domestic product ratio of 35 percent by 2026-27. These states will need to undertake significant corrective steps to stabilise their debt levels,” the RBI staff had warned.

Rajasthan has imposed no new tax over the last five years, according to the budget documents.

Its fiscal deficit stood at 5.9 percent in 2020-21, 5.2 percent in 2021-22 and 4.3 percent in 2022-23. This was higher than the fiscal deficit of 4.1 percent, 3.7 percent and 3.4 percent for all Indian states and union territories for the three fiscal years, respectively.

It must be noted that the Centre has limited states’ fiscal deficit at 3.5 per cent of gross state domestic product for 2023-24, of which 0.5 percent is tied to power sector reforms.

The fiscal deficit for 2023-24 is estimated to be 3.2 percent in 26 states and union territories, well within the Centre’s target, according to the RBI. Rajasthan is clearly in breach of the deficit limit.

Going ahead, Rajasthan aims to lower the deficit to 3.98 percent in 2023-24 and further bring it down to 3.49 percent in 2024-25 and 2.99 percent in 2025-26.

Fifth most indebted state
Rajasthan’s total outstanding liabilities have risen over fourfold in a decade to Rs 5.4 lakh crore at the end March 2023. This makes it the fifth most indebted state in India after Tamil Nadu, Uttar Pradesh, Maharashtra and West Bengal, according to the RBI's report on state finances.

Rajasthan’s total outstanding liabilities, which include power sector-related debt, stood at 40.2 percent of gross state domestic product in March 2023, much higher than 29.5 percent for all states and union territories put together.

The state’s market borrowings have remained around the Rs 50,000-crore mark over the last few years with interest payments around Rs 28,000 crore, according data from RBI.