Fiscal Analysis of recently formed States: JHARKHAND
Jharkhand as a land is one with a long history and profound cultural importance. The blessings of which exist today, as abundant natural resources and minerals. It ranks first in terms of its copper ore, mica, asbestos and even uranium; second in chromite, third in coal and fourth in iron ore. Besides these, it also has substantial reserves of manganese, china clay, limestone and graphite.
Considering these facts, there is little doubt as to why Jharkhand’s major industries are mining, iron and steel production and metallurgy with food, beverages and agricultural products a close second, according to India Brand Equity Foundation. But despite its resource riches, the state faces an acute problem of unemployment, lack of good education and training, poverty and malnutrition. All of which contributes to a severely low positioning on the state Human Development Index.
Having separated from Bihar in 2000, Jharkhand has had a distinct administrative history of 23 years. With a period of steadily increasing Gross State Domestic Product (GSDP) growth, recording a growth of 8.2% in 2021-22 which was just marginally below the country’s growth rate of 8.7%.
Although these are respectable numbers by themselves, wider data suggests that GSDP growth by itself has not been sufficient to indicate sustainable improvements in the quality of life and infrastructure in Jharkhand. The question remains, how is budget allocation impacting its human development? What avenues does it need to pay further attention to?
Following our Series pattern, we’ll be analyzing Jharkhand’s fiscal management and condition on the basis of its Debt to GSDP ratio along with its fiscal deficit, capital expenditure and its ease of doing business.
- Debt to GSDP Ratio
Coming to our first indicator, the debt to GSDP ratio, expresses the state’s total debt liabilities as a percentage of its GSDP. A higher figure represents a higher probability of inflation, combined with an increased interest payments burden which leads to decreased spending on infrastructure development projects.
For this reason, the Fiscal Regulation and Budget Management (FRBM) act of 2005 recommends a Debt to GSDP Ratio of under 25%, which was revised to 20% in 2018.
The case with Jharkhand in this regard, has been previously red flagged by the RBI in a 2021 report. It still ranks among the top 10 states with the highest Debt to GSDP ratios, with Bihar, Punjab, Andhra Pradesh and West Bengal among others.
The state has consistently breached the advisable debt ceiling and has a serious problem of mismanaged funds towards the repayment of its loans. This can, perhaps, be attributed to a discrepancy between budgeted and actual figures of required funds.
The point is further bolstered by a remark by the Comptroller and Auditor General of India, who with reference to the 2020-21 state budget said that the state’s borrowing through market loans could have been avoided by utilizing the excess cash balance available at the time.
Another reason can be the growing number of subsidies resulting in increased spending on welfare schemes or “freebies”. Jharkhand ranked among the top states to give out the most freebies between the 2017-18 and 2020-21. The debate surrounding is that a larger portion of spending on such freebie schemes and subsidies can strain the fiscal balance by necessitating further undertaking of loans and debt.
Despite its alarming situation with the debt to GSDP ratio, the state has still shown some promise with limiting its fiscal deficit. The RBI recommended limit is 3% of the state GSDP, which Jharkhand has been intermittently successful so far in managing. While the budget estimate for 2021-22 was of 2.8%, the actuals gave a strikingly healthy 0.8% fiscal deficit. The revised estimates for 2022-23 also gave a healthy 2.31%, lower than the budget estimate of 2.8%.
Nonetheless, the high debt to GSDP ratio compared to other states is a cause of serious concern which needs to be addressed. Moreover, another concerning factor is that the state’s Accounts at a Glance 2020-21 report also mentions that their own tax revenue has been following a decreasing trend since 2015-16. This shows a pressing need to boost tax collection means, lacking which, the state might face dire straits in its fiscal management in the long term.
- Capital Expenditure (Capex)
The capital expenditure is the amount spent on the creation of new assets in the economy in the form of infrastructure like bridges, roads, irrigation systems, education, healthcare among others. Spending on these avenues not just injects and invites further investments from private enterprises into the economy, but also creates sources of revenue for the government which are long term beneficial.
Jharkhand has presented a critically alarming case on this front, where it’s capex figures are in fact seen to be declining. This poses a serious threat to the state’s long term potential to attract new private investment and also runs the risk of aggravating its already difficult unemployment scenario.
So far in this series, we have analysed the state’s expenditure one-off, but here we will also put into perspective its proportion of capital expenditure with the revenue expenditure. While capex leads to the creation of long term assets for the government, revenue expenditure is directed towards the fulfillment of its everyday operations, debt obligations and those which do not lead to the creation of assets.
Naturally, revenue expenditure is almost greater than capex in most budgets, but the difference between them must not be too much as reduced capex can stunt the growth of the economy in the long term.
Jharkhand has shown warning signals even in this case, where the difference between the two has been sharply widening.
The most worrisome criteria to judge here, is the state’s allocation of funds towards education and health.
Although these two avenues remain among the highest priorities in its budget, the per capita expenditure, unfortunately, still falls short of the requirements and the per capita national average.
Jharkhand spent 15% of its budget towards education in 2020-21 and 15.3% (B.E.) in 2022-23, both of which were similar to the national average of 15.2%. However, according to PRS Legislative’s State of State Finances report 2022-23, it rounded up to a per capita spending of only a measly INR 3626. This was the second lowest in the per capita spending among all Indian states. The consequences of this are unfortunately evident, as the state faces a higher education Gross Enrollment Ratio (GER) of only 17% which is the lowest among all newly formed states reviewed in our series so far.
Another report by the Unified District Information System (UDIS) for Education said that Jharkhand ranks highest among 22 other states in the country where about 22% of its total students in government schools study in single teacher environments. The state faces a severe shortage of school teachers who have not been hired at the same rate they have been retiring.
An analysis of the state’s Accounts at a Glance reports across three years from 2019-20 to 2021-22 reveals that expenditure on higher and technical education has consistently been marked under the ‘savings’ header, owing to their improper implementation.
Similarly disconcerting situations exist for healthcare in the state. The National Family Health Survey-4 data, about 45% children under 5 years of age were stunted and underweight. Hence the state has been adding hospitals and medical colleges. A recent addition of 100 government hospitals in 2022 considering now the total is 4463 hospitals with total beds of 14891. The number of beds is comparable to that of Himachal Pradesh, where the population of Jharkhand is leaps and bounds ahead of it.
- Ease of Doing Business
The state was ranked 3rd in the index’s inaugural year of 2015, from which it slipped in the 2017 edition to 7th. From thereon it climbed back to 4th and has since dropped back to the 5th place in 2019. Consequently, it was put in the (3rd) Aspirer’s category post the omission of the ranking system, along with other states such as Assam, Chhattisgarh, Goa and Kerala.
Although ranking 5th among 32 states seems not so bad, the yearly jumps and drops show the state’s intense grapple with its business class populace.
Reports from the Jharkhand Chamber of Commerce mentioned an “unfriendly” attitude of the ministry officials and a defunct single window system for clearance of matters.
Although the iron and steel industry has grand projects underway, the state has an acute need of stimulating an environment suitable for small businesses that will lead to stable capital formation.
Concluding Remarks
In consideration of the above analysis, Jharkhand has a substantial amount of issues to resolve before it can be suitably placed at the helm of Indian economic growth.
The primary challenges certainly involve resurging the state’s capital expenditure. A persistent yearly problem with this has also been the stout discrepancy between the budgeted and actual figures. With 2019-20 recording a (-)28% difference between budgeted and revised estimates for capex. This declining trend of capex must be reversed in order to reinforce investor sentiments and also boost asset creation which can lead to stable sources of revenue for the state in the longer run.
A recurring problem in the state is also of unemployment, which stood at 17.54% in March 2023 and for which the government recently announced an allowance of INR 5000 for undergraduate and INR 7000 for graduate youth under the Berojgari Bhatta scheme.
Keen attention must be given to increase spending towards education and improve the quality of training and hiring for teachers at the unit level. Renewed and additional attention shoukd be given to these kinds of long term investments which can improve educational and later employment standards in the state instead of short term solutions like allowances, which drain government resources without creating value.
The state has an immense unrealized potential in terms of increasing its production capacity for mining as well as creating further small businesses and enterprises surrounding its natural resources among other industries. The potential can only be realized with a long term aspiration in mind and accordingly necessary budgetary allocation in the same direction.
Aarya Gandre
Aarya Gandre is a Research Intern at Tatvita Analysts. He is pursuing his Bachelors in Economics.
