States Face Fiscal Stress from Freebies and High Expenditure, Says FM
Union Finance Minister Nirmala Sitharaman has issued a stark warning about the growing financial strain on Indian states due to excessive spending on populist freebies and high committed expenditures. Speaking at a recent event, she stressed that while welfare schemes are vital, unsustainable policies threaten long-term economic stability.
The Rising Burden of Freebies
“Freebies“—such as free electricity, water, laptops, and cash transfers—are politically appealing but often drain state budgets. These subsidies, while beneficial in the short term, divert funds from essential infrastructure, healthcare, and education projects.
Sitharaman noted that many states allocate a large share of their budgets to recurring costs like salaries, pensions, and interest payments, leaving little for development. “Prioritizing short-term gains over fiscal prudence is a dangerous race to the bottom,” she warned.
Alarming Debt Levels in Key States
Recent Reserve Bank of India (RBI) data highlights severe fiscal stress in states like Punjab, Rajasthan, Kerala, and West Bengal, where debt-to-GDP ratios exceed 30%. For example:
– Punjab spends nearly 40% of its revenue on interest payments.
– Rajasthan’s power subsidies consume a massive portion of its budget.
With over 60% of revenues locked into committed expenditures, states struggle to fund growth-oriented projects. Sitharaman cautioned that without reforms, some states could face crises similar to Sri Lanka’s 2022 economic collapse.
Populism vs. Prudence: A Growing Debate
The freebies debate has intensified ahead of elections, with parties promising lavish schemes to attract voters. Economists, including former RBI Governor Raghuram Rajan, warn that reckless spending jeopardizes macroeconomic stability.
Sitharaman urged states to adopt targeted, time-bound subsidies and improve Centre-state coordination to ensure efficient welfare delivery. “Welfare must not burden future generations,” she emphasized.
Solutions for Sustainable Fiscal Health
Experts recommend these measures to curb the crisis:
1. Rationalize Subsidies: Shift to direct cash transfers to reduce waste and ensure aid reaches the needy.
2. Increase Revenue: Strengthen tax compliance, expand GST coverage, and privatize loss-making PSUs.
3. Enforce Fiscal Discipline: Stricter fiscal responsibility laws to limit populist spending.
4. Invest in Growth: Redirect funds to infrastructure, skilling, and industrial development for long-term gains.
Conclusion
Sitharaman’s warning underscores the urgent need for states to balance welfare with fiscal responsibility. As India targets a $5 trillion economy, prudent financial management at all levels will be critical. Sustainable policies—not short-term populism—will drive lasting progress.
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