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Fiscal Analysis of recently formed States: UTTARAKHAND

Fiscal Analysis of recently formed States: UTTARAKHAND

Despite its relatively small size, Uttarakhand was the second fastest growing Indian state just 2 years after its separation from Uttar Pradesh in the year 2000. This is resplendent by the fact that between FY 2005 and 2012, its GSDP doubled with a compounded annual growth rate (CAGR) of 13.7%.

With 86% of its total area being mountainous in nature and 65% covered by forests, Uttarakhand’s economic challenges are unique and varied. However, the state’s government and its people have shown admirable adaptability towards coping with them, utilizing horticultural means in its primary agricultural output.

The state even ranked 4th in the SDG India Index 2020-21 released by RBI, showing remarkable dedication to the incorporation of sustainable practices in its industry and emerging as one of the leading states in the country.

The previous point regarding its commitment to sustainable goals is more so highlighted, when one considers the fact that about 52% of the state’s GSDP is attributed to the industrial sector. Among the rest, agriculture accounts for just 9% owing to the land’s rugged terrain and services account for another robust 39%.

What superficially appears as consistent economic growth, however, when taking a nuanced approach, reveals several warning signs for the government to change its current policies. We seek answers to the question, how and why did the economy of Uttarakhand decelerate its growth trajectory?

In this spirit, continuing our series of studying newly formed states, this article intends to maneuver its analysis through the same holistic approach it took earlier, for Chhattisgarh. We will utilize the metrics of Debt to GSDP Ratio, this time combined with an examination of Revenue Receipts as well as the Capital Expenditure and its impact on health and education and finally the Ease of Doing Business.

  • Debt to GSDP Ratio

Recapping the definition of this metric, the Debt to GSDP Ratio is a measure of the fiscal budget management of the state by its government. It is a ratio of the state’s total debt liabilities to its Gross State Domestic Product, expressed in percentage terms.

Too high of a debt to GSDP ratio for a state, is a red signal indicative of inflationary pressures and a reduction in economic activity many a times leading to a recession. This is due to the fact that higher debts compel the government to make higher interest payments which narrow the scope for government investments in the creation of better transport, logistics and business infrastructure, education among other services.

It is due to this reason that the FRBM Act, 2005 recommends the Debt to GSDP Ratio to be under 25%. This has further been reduced to 20% in 2017 according to the RBI’s advisory parameters.

Unfortunately, Uttarakhand has persistently been in breach of this limit between FY 2018 and 2022.

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

In the figures, although the sharp rise in FY 2020-21 can be attributed to the Covid-19 pandemic, we can see that the debt levels were consistently rising even leading up to that year before the pandemic. The ratio has not yet subsided under the 2005 advisory limits of 25% and therefore serves as a warning sign for the government.

The same concern was flagged by the Comptroller and Accountant General of India in his 2021 report, where he suggested measures such as a stricter attention towards collection of tax revenue. In fact, a similar report by the Indirect Taxes Central Board in 2021 placed Uttarakhand at the fifth position, country wide, in terms of its GST collection deficit, which was at 40.6%. This has been an evident cause of concern for the government in regards to the management of their budget and public debt.

On the contrary to this, was the government’s response to this finding, which was largely positive. Post FY 2020-21, the revenue collection showed substantial increase. Where the revenue receipts of the state between 2017-18 and 2019-20 increased by only 13.34%, the change between 2019-20 and 2021-22 was about 40.14%.

Source: Accounts at a Glance, (Government of Uttarakhand)

In the long term, this marked increase in the revenue receipts, if kept consistent, is likely symptomatic of a reversal in the trend of the Debt to GSDP ratio as well and can lead to healthier outcomes for the state’s budget in the future.

  • Capital Expenditure

Coming to the second metric, the capital expenditure (or capex) is the portion of the total expenditure from the government budget which leads to the creation of direct assets for the government’s benefits. This is divided into three sections, General Services (including administrative spending, etc.), Social Services (Education, Healthcare, Water and Sanitation, etc.) and Economic Services (irrigation, infrastructure, transport, etc.)

In the aforementioned 2021 report by the Comptroller and Accountant General of India, one of the central recommendations given was to increase the state’s capital expenditure towards economic services which will create assets that yield stronger revenue inflows for the government while simultaneously creating infrastructure to support growth.

Accordingly, the state government also took initiatives to increase the same, the impact of these measures is seen in the direct increase of these figures from FY 2019-20 to 2021-22.

Source: State Economic Survey, Government of Uttarakhand 2021-22

Although Economic Services account for the highest proportion of the total capital expenditure, the two individual avenues which incur the highest costs are Education and Healthcare.

Uttarakhand in FY23 was projected to allocate 18.2% of its total expenditure to Education.

However, the ‘State of State Finances 2022’ Report by PRS India, found that in spite of having a population lower than 2 crore, the per capita expenditure for education was only at INR 9411. The number even fails to cross the ten thousand rupee ceiling which most other states having a similar demography have accomplished. This can be attributed to low levels of per capita income which stood at INR 205,840 in FY22.

The state has a serious need to improve, when comparing its Gross Enrollment Ratio (GER) in higher education institutions to other states with similar budget sizes and economies. The GER is the percentage of total enrollment in higher education with respect to the total official eligible population at that age. In 2021-22, this metric stood at 33.9% for Uttarakhand; considerably below the NEP 2020 target of 50%.

Himachal Pradesh in comparison had a higher GER of 38.07% and has committed to reaching 60% in the next two years. Surprisingly, Uttarakhand’s per capita incomes are higher than that of Himachal Pradesh, yet HP has a higher per capita expenditure for education and a higher GER Ratio.

In terms of Healthcare, in the same PRS 2021 report, Uttarakhand was reported to have a per capita healthcare expenditure of just INR 3814, which is the second lowest among all states having a population under 2 crore. This is a severe problem as states with similar budget sizes are spending more than INR 4500 on average in this area.

According to the RBI Handbook of State Statistics, the total number of government hospitals in the state was just at 618 with total beds amounting to a mere 8106 in 2019. Even in 2022-23, the number has hardly improved. With an infant mortality rate of 24 deaths per thousand and only 52 out of the sanctioned 236 surgeons and specialists in position at hospitals, Uttarakhand ranks among the bottom five states in the country in regards to its healthcare system.

  • Ease of Doing Business

In terms of managing its capitalistic economy, Uttarakhand still boasts a high industrial output with Gross State Value Added (Industrial) at INR 108,315 crore in FY22. This is a stellar figure as it is comparable with other states like Chhattisgarh that has much more of an advantage in its land area and working age population.

The government has taken extraordinary steps to ensure a strong network of highways which stood at 4517 kms in 2019, even higher than further developed states of Telangana and West Bengal. The installed power capacity of the state was at 3095 megawatts in 2020-21 which distributed to 1524 MWs per capita in the same year, among the highest in the country.

All these factors have contributed to a jump in the state’s position on the DPIIT Ease of Doing Business Index. When the index was in its first edition in 2015, Uttarakhand was ranked 23rd, however just four years later in 2019 it stood 11th, which was just one place below the industrial giant of Gujarat. The government has shown commendable resolve in improving the state’s business ecosystems.

Concluding Remarks

Uttarakhand has shown serious inclinations towards improving its fiscal performance and the management of its budget, even towards the improvements in its bureaucratic framework to increase ease of doing business. This can be visibly seen in its indicators as we examined them.

The state is consistent among many other Indian states in the current scenario where strides in bettering business ecosystems have been made at the cost of the human development indicators like education, healthcare, employment and social security.

Akin to Chhattisgarh, its slow improving GER is a major stunt in the creation of skilled labour which has sent unemployment soaring. The urban overall unemployment in 2021-22 stood at 105 people per 1000 which was the sixth highest in the country. Similarly, the rural unemployment stood at 55 per thousand which was still among the highest across all states. Amongst this, with poor healthcare systems, suffering education and high unemployment, Uttarakhand’s largest resultant problem has been migration.

Both uneducated and educated youth settling outside the state in search of better opportunities with 36% of those migrated having ‘gone for good’. This has come to be a major issue to tackle for the government in the last decade. Dwindling agricultural output and lack of rural employment opportunities has led to a mass exodus of youth to more urbanized cities.

The state’s GSDP growth rate had nosedived to 1.2% in 2019-20 even in pre-pandemic conditions. Higher debts within the state had earlier increased inflationary pressures to 8.1% which was felt further by the growing unemployed youth.

Considering all factors, at this stage, it is necessary for the government to inculcate the long term advantages of further investments in sectors like education healthcare and road construction in its budget planning.

The most important investments need to be made in agriculture, like irrigation and horticulture practices to boost rural employment opportunities. Increased allocation of funds in these areas, perhaps in the form of subsidies and farmer benefits, will likely ensure agriculture to constitute a larger share of the GSDP.

Although economic management has shown preliminary signs of improvement in the last 3 years post pandemic, it is these human development areas which need committed attention.

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