Reckless spending at state level could disturb Modi's reform plans

While the central government has finally got its finances under control, the same can’t be said about the states, which continue to be reckless with their spending.



Given the vast populations of India's states, they are allotted enormous budgets, which if smartly used can turn around the condition of these states, but most of the states sadly fail to do so.

While centre has brought down its fiscal deficit to 3.5% of GDP from 5% a few years ago, in the states these deficits are widening, contributing to the financial position of the country not being too different from what it was five years ago.

To add to the woes, this problem might get worse in the days to come, thanks to populist farm waivers and other spending sprees, to win voters’ confidence before the 2019 general elections.

"There's definitely reason to be concerned over the way things are going," Shilan Shah, the Singapore-based India economist for Capital Economics, told Bloomberg.

With states spending their budgets carelessly, borrowing costs for Indian companies could rise, given that state-owned banks are forced to buy state-issued bonds. This would lead to a further downfall in the private sector which is already suffering because of lack of investment. Due to this sluggish investment pace, GDP growth has been slower and jobs have also been suffering.

Not only this, it would also impact the chances of India getting a ratings upgrade to improve the confidence of global investors.



In gist, Modi's reform agenda would suffer because of the states’ spending.

However, it’s not like Modi and his Bharatiya Janata Party can’t be blamed for these outcomes.

It was after BJP's victory in Uttar Pradesh, that Yogi Adityanath had waived off loans of the state's farmers, which put other states under pressure, leading to Maharashtra, Karnataka and Punjab also announcing loan waivers. And now, farmers in Gujarat, Madhya Pradesh, Haryana and Tamil Nadu are also asking for their loans to be waived off, costing these governments hundreds of billions of rupees.

With weaker economic growth, India’s tax revenues are hurt, and with more budget allocated to public sector wages and subsidies, productive investments like infrastructure development are suffering.

"Markets could forgive an infrastructure spend," Shah said. "They're less likely to forgive spending on wages."