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Yadav’s Rs 2,40,000 Crore Mountain Of Debt & Promises Of Freebies

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Uttar Pradesh’s incoming Chief Minister, Akhilesh Yadav of the Samajwadi Party, rode in on the youthfulness of his demeanour and the attractiveness of his giveaways.


Mr Yadav, son of four-time Chief Minister Mulayam Singh Yadav, promised a slew of goodies ranging from unemployment allowance and loan waivers to free electricity, free laptops and tablet PCs. Estimates already say that UP would need Rs 11,000 crore annually besides a one-time expenditure of Rs 11,000 crore to deliver on these promises.


IndiaSpend’s Dhritiman Gupta takes a close look at the state of Uttar Pradesh’s finances and the economy story so far and asks if delivering on these promises will be financially feasible.


UP At A Glance


UP is India’s most populous state. According to Census 2011, it accounts for 16% of India’s population of 1.21 billion. UP’s Gross State Domestic Product in 2010-11 was Rs 542,544crore.


Given the size of the state, its economic performance assumes tremendous importance. Let’s look at the state’s growth rates over the last 4 years.


  2007-08 2008-09 2009-10 2010-11
UP GDP Growth Rate (in %) 7.5 6.1 7.2 8.08
National GDP Growth Rate (in %) 9.3 6.8 8.0 8.5


Source: Planning Commission Annual Report 2010-11


The interesting thing to notice from the table above is that the growth rate of Uttar Pradesh’s GDP has been lower than the national average in all the 4 years.


Challenging Fiscal Deficit


The following table gives us the most important financial indicators.


Uttar Pradesh 2005-08 (Avg) 2008-09 2009-10 (RE) 2010-11(BE)
RD/GDP (in %) -0.7 -0.5 -0.4 -0.1
GFD/GDP (in %) 3.5 5.0 4.9 4.4
Debt/GDP (in %) 53.2 46.8 43.5 45.8


RBI, 2010-11, State Budgets

RD: Revenue Deficit, GFD: Gross Fiscal Deficit, Deficit (+), Surplus (-), RE: Revised Estimates, BE: Budget Estimates.


The table shows that Uttar Pradesh has been recording a revenue surplus since 2005. The revenue surplus is the money that the state has in its coffers after spending what it receives as revenues. However, the percentage of revenue surplus to GDP has been falling consistently over the period. The lowest surplus in percentage terms was recorded in 2010-11 with the amount at Rs 566 crore.


UP’s Gross Fiscal Deficit (defined as Revenue Deficit + Capital Outlays + Net Lending – Non- Debt Capital Receipts) has stayed at a high rate of 4.4% in 2010-11 despite efforts to bring it down. This figure is however down from the high rate of 5% that the State reached in 2008-09.


Ominous Debt Situation


UP’s Debt-GDP ratio is ominous. The state’s outstanding debt at the end of March 2011 was Rs 2.4 lakh crore which translates to 45.8% of the State GDP.


In fact, Uttar Pradesh had the highest Debt-GDP ratio among all states, over the period studied in the following table.


Year 2nd after UP Debt/GDP (in %) Debt/GDP of UP (in %)
2005-08 (Average) Rajasthan 47.2 53.2
2008-09 West Bengal 42.5 46.8
2009-10 West Bengal 42.8 43.5
2010-11 Rajasthan 40.9 45.8


RBI, 2010-11, State Budgets


The Debt-GDP ratios assume serious proportions when we consider the interest payments the state has to make. Given the fact that the revenue surplus is on the decline, unless revenue receipts rise considerably in the future, there will be problems.


UP’s Financials


The following table looks at some interesting fiscal numbers of Uttar Pradesh.


Uttar Pradesh 2008-09 (in Rs Cr) 2009-10 (RE) (in Rs Cr) 2010-11(BE) (in Rs Cr)
Gross Fiscal Deficit 20,513 23,870 22,742
Gross Interest Payments 11,375 12,330 13,492
Total Tax Revenues (a+b) 59,565 66,967 77,823
Own Tax Revenues (a) 28,659 35,255 42,306
Centre’s Contribution (b) 30,906 31,712 35,517


RBI, 2010-11, State Budgets


The Gross Fiscal Deficit for the country was the highest for Uttar Pradesh in 2008-09. During 2009-10 and 2010-11 the Gross Fiscal Deficit for Uttar Pradesh was second highest in the country, the highest being Madhya Pradesh. The decline of the Gross Fiscal Deficit over the period 2009-10 and 2010-11 masks the fact that Capital Outlay fell from Rs 25,222 crore to Rs 22,943 crore.


As far as Gross Interest Payments (GIP) is concerned, UP is right up there just behind West Bengal and Maharashtra for all the 3 years studied. The GIP has shown a steadily increasing trend over the period even though GIP/ Revenue Expenditure Ratio has gone down steadily from 15% in 2008-09 to 12.1 % in 2010-11.


Strain on UP’s Finances


Nevertheless, just the sheer amount of interest payments made and the fact that UP has a high GIP/Revenue Expenditure Ratio shows that there is a huge strain on the state’s finances.


Rankings State Average GIP (2008-11) (in Rs. crore)
1st Maharashtra 14,123
2nd West Bengal 13,143
3rd Uttar Pradesh 12,399
4th Andhra Pradesh 9,119


RBI, 2010-11, State Budgets


Andhra Pradesh ranks 4th in the country in terms of Gross Interest Payments.  Over the period, Andhra Pradesh has made average interest payments to the tune of Rs 9,119 crore as against Rs 12,399 crore paid by UP. This gap speaks for itself.


However, if we were to look at the Net Interest Payments (Interest Payments-Interests Receipts) instead of Gross Interest Payments, the rankings change with Uttar Pradesh ranking second with an average NIP of Rs 11358 cr behind Maharashtra which has an NIP of Rs 13,030 crores.


UP’s Tax Collections


Over the period studied UP had the highest Share in Central Taxes of all the states followed in the second spot by Bihar.  UP has on average received Rs 32,711 crore from central taxes as against Rs 19,815 crore received by Bihar in these 3 years.


The Own Tax Revenue collection by the state, however, has been quite poor. A simple comparison with the better performing state of Maharashtra will illustrate the point better.


  Maharashtra 2008-09 2009-10 2010-11 Uttar Pradesh 2008-09 2009-10 2010-11
Total Tax Revenue (in Rs cr) 60,048 63,959 74,722 59,565 66,967 77,832
Own Tax Revenue (in Rs cr) 52,030 55,711 63,838 28,659 35,255 42,306
Centre’sContribution (in Rs cr) 8,018 8,248 10,884 30,906 31,712 35,517
Own Tax Revenue/ Total Tax Revenue 86% 87% 85% 48% 52% 54%


RBI, 2010-11, State Budgets


Since UP is one of the lesser developed states it is quite understandable that it commands a larger share in Central Taxes.


But what about its record in collecting its own tax revenues?


The percentage of state collected taxes to total taxes hovers around 86% for Maharashtra whereas for UP it is 52%. As you can see from these figures, UP depends on the Centre for a lion’s share of its Tax Revenue.


And Now The Promises…


In the face of huge Debt-GDP ratios, declining Revenue Surplus, declining investments, poor tax collections, and a general state of underdevelopment the new government will have its hands full even without trying to keep its promises. It would do better by trying to boost investments, enhancing growth and strengthening the finances of the state, which presently do not look very healthy.

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