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Fiscal Analysis of recently formed States: CHHATISGARH

Fiscal Analysis of recently formed States: CHHATISGARH

Chhattisgarh is one of the lesser known and even lesser talked about states of our country. Having separated from Madhya Pradesh and gained recognition as an independent state on November 1st, 2000, it is relatively newly formed, yet boasts a commendable administrative position in India.

Recently, even the RBI lauded its financial governance by calling it “one of the most fiscally well-managed states of our country.”

Despite having 76.76% of their population settled in rural communities, ideally indicating an agrarian inclination, the state still reported its industrial and services sectors as the larger constituents of their GSDP, at 34.29% and 37.69% (at current prices) in FY21.

So what exactly did the RBI mean by its comment and how is the Chhattisgarh government faring in terms of their fiscal goals?

This article aims to make use of three key macroeconomic indicators to deduce the same. These are namely, the state’s Debt to GSDP Ratio, its Capital Expenditure, and its Ease of Doing Business.

The analysis will be using data published by the Chhattisgarh or Central government in regards to FY18, FY19, FY20, FY21 and FY22. The underlying intention will also be to compare these figures against other socio-economic metrics like education and literacy, employment, number of startups etc, to obtain a holistic understanding of the state’s performance.

  • Debt to GSDP Ratio

Beginning with the first parameter, the debt to Gross State Domestic Product (GSDP) ratio is calculated by taking the ratio of total public debt to GSDP of the state in percentage terms. It is the first indicator of how much the state’s government owes to its creditors like banks, the RBI or the central government with respect to how much value it produces.

Typically a higher debt to GSDP ratio leads to inflationary pressures on the economy in the long term and chokes further capital expenditure or government investments. In these cases, there is also a risk of rising interest and tax rates that halter people’s ability to spend or invest their money and strain long term incomes, usually causing a recession.

For these reasons, the FRBM Act of 2003 has set financial disciplinary targets which advise this percentage ratio to be below 25%.

Chhattisgarh, in the last 5 years has consistently met this target with great success, falling well under the ceiling every year.

Source: Chhattisgarh Accounts at a Glance 2021-22 (Government of Chhattisgarh)

Although solid economic views on this topic differ, patterns indicate that the real GDP growth rate is boosted with excessively high public debt initially, and later falls.

Studies from the Cato and Mercatus Institutes have found that an increase in public debt by 1% in a year leads to fall in GDP growth by 0.012% the following year. However, we can observe that the Chhattisgarh’s GSDP also has increased at a steadily increasing rate in the same time period indicating that government expenditure is at desirably optimum levels.

Source: State Economic Survey 2021-22 (Government of Chhattisgarh)

In fact, the State Economic Survey found the Compound Annual Growth Rate, which indicates the average rate of revenue growth to be 9.2% in FY 2021-22 and has estimated the GSDP to grow at 8% in FY 2022-23 which is higher than the country’s GDP growth rate at 7.7% in the same financial year.

  • Capital Expenditure

Having established the stable condition of the state’s government debt, this brings us to the analysis of the second parameter: its capital expenditure or capex.

The capital expenditure is the budget expenditure of the government which directly contributes to the creation of assets for its people. This includes infrastructure, technology, healthcare, public companies, banking, education etc.

A higher capital expenditure stimulates the improvement of industrial conditions in the region which in turn propels businesses to make investments and boosts investor confidence. Better healthcare improves labour social security, better infrastructure help bolster supply chain logistics and transport, and expenses on quality subsidized education creates skilled labour in the long term.

Chhattisgarh has fared well in this regard as well. With annual Capex steady between Rs. 8.6 thousand crore to Rs. 10.8 thousand crore, the former resulting from the dip during FY 2019-20 due to the covid-19 pandemic.

Source: State Economic Survey Data 2021-22 (Government of Chhattisgarh)

According to the RBI State of States Report 2022-23, Bihar and Chhattisgarh rank as the states with highest Capex on education with Chhattisgarh at 18.82% of its GSDP which is markedly higher than the RBI advised 6%. However, the high population of the state reduces this budget’s impact with per capita expenditure on education at only Rs. 6523, which is 4th highest, yet still less among states with populations over 2 crore.

This is strongly visible in the state’s Gross Enrollment Ratio (total enrolment in a specific level of education, regardless of age, expressed as a percentage of the eligible official school-age population corresponding to the same level of education) for 2021-22 which is very high at 95.9% for elementary upto 10th grade levels, but abysmally low at 18.5% for higher education and degree level. This number is dangerously bound to affect the creation of skilled labour in the long term and is lower than the prescribed NEP 2020 target of 50% for all states.

Similarly, 6.1% is allocated to health expenditures, which is 3.1% more than the RBI advised 3%. However, similar problems like in education persist where only the expenses only amount to Rs. 2154 per capita for health owing to the state’s population. Effects of these can also be seen in the infant mortality rate of the state which is consistently high from 2015 to 2029 (recorded 40 deaths per 1000 births in 2019 by PIB) and lower only than the states of UP, Madhya Pradesh, Rajasthan and Odisha.

  • Ease of Doing Business

This brings us to our last metric. A relatively new measure and index brought to inculcate a spirit of healthy competition between all states to improve their business environment.

The index takes into account factors like taxation, property rights, ease of obtaining construction permits and other licenses, labour laws, access to information and single window systems etc.

The formation of the index is based on the guidelines set by the World Bank and subsequently managed by the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry. The department has advised to implement 301 points in accordance with the Business Reform Action Plan (BRAP) 2015 which was later updated to 372 points in 2017-18.

Chhattisgarh was ranked well, at 4th place amongst all 32 Indian states initially, but slid down by 2 positions to 6th in 2019. In 2017 it was instrumental in implementing 367 out of the 372 points recommended by the DPIIT with a 97.46% implementation rate. In 2020 it was ranked within the Aspirer’s category which was 3rd and below the much higher ranked states in the Top Achievers and Achievers categories under the modified framework of the BRAP.

Concluding Remarks

Chhattisgarh’s largest advantages are its sources of mineral reserves leading to an abundance of metallurgical industry and mining.

The state produces as many as 28 major minerals including coal, iron ore, limestone, and bauxite. It accounts for 21% of India’s coal production, 16% of iron ore production, 15% of tin production, and 10% of limestone production.

The Korba district in the state is known as the power capital of India and the state’s combined exports of aluminium and products, iron and steel, iron ore and iron and steel products reached USD 1,629.76 million in FY22.

We can say that although Chhattisgarh ranks very high in terms of its fiscal management when compared to other states with fiscal deficit being low at 2.99% in 2021-22, which is under the RBI advised limit of 3%, (they even project a fiscal surplus of INR 1500 crores in FY2024).

The state has a serious problem in terms of its Gross Enrollment Ratio which in the long term can cause problems in the creation of skilled labour. Although it has one of the lowest unemployment percentages, (0.3% in 2021) the income levels still dwindle. One of the possible cause behind it can be the lack of skilled labour that results in lower per capita incomes and therefore, lower investments in entrepreneurial ventures.

The same remains as a problem in terms of health where the budget, despite being above the RBI advised rates falls short to cope with the needs of the public indicated by high infant mortality rates.

Overall, the state has a large potential to further bolster its manufacturing and service sectors and the government seems to be wary of these issues with several initiatives showing results. They have recently developed seven industrial parks and three integrated infrastructure development centers (IIDC) and a notified special economic zone (SEZ) in Rajnandgaon District. In February 2020, Chhattisgarh had two formally approved SEZs. Chhattisgarh’s GSDP CAGR (Compound Annual Growth Rate) was at a record of 9.92% from 2017 to 2022. All these indicators show a fairly healthy state performance that will likely continue through the next 5 years.

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