Tighten your fiscal belt or sink: IMF ED Krishnamurthy Subramanian warns select states

Himachal Pradesh, Kerala, West Bengal, Andhra Pradesh must cut unproductive expenditures, says Krishnamurthy V Subramanian. The former Chief Economic Advisor also said that states with large revenue deficits will find it tough to get out of debt as these are also the states where the growth rate of state GDP is not so high.

New Delhi: States with relatively high revenue deficits such as Punjab, Himachal Pradesh, Kerala, West Bengal and Andhra Pradesh must take a leaf out of their healthy counterparts’ book, Krishnamurthy V Subramanian has told ET, adding that the fiscal position in those states is a matter of concern even as the overall situation seems to have improved from the peak of the pandemic.

IMF ED Krishnamurthy V Subramanian
Likening their fiscal situation to “aamdani atthanni kharcha rupaiya” (spend twice than you earn), Executive Director of the International Monetary Fund (IMF) said “there is no option for these states but to implement some necessary, though not popular, decisions to tighten their fiscal belts by reducing unproductive expenditures.”

The fiscal situation of these states is like a leaky boat that can have only one outcome – “sink”, he added.
Terming the non-merit subsidies or freebies an “impending fiscal problem”, he said such measures don’t generate any productive capital investment, which is why it’s a big problem.
“When a state does not undertake capital investment, there is no possibility of crowding in private investment. Therefore, higher Gross State Domestic Product (GSDP) growth is ruled out. So, these states cannot grow out of debt,” he added.Subramanian, who is IMF’s executive director for India, Bangladesh, Bhutan, and Sri Lanka, further said the outlook for India is positive. “Overall fiscal deficit has gone down and is lower than budget estimates for two consecutive years. Total liabilities as a per cent of GDP have decreased,” he said.
He then said, “And most crucially, as the RBI report on state finances found, GST implementation has increased tax buoyancy for the states, which suggests that this overall improvement in the fiscal situation of states can be sustained.”

According to Subramanian, foreign investors have interpreted the recent round of state election results (in which ruling BJP had resounding victories in three key states) as indicative of continued stability in the central government. “As the central government is seen by investors as having the zeal to reform the Indian economy and take it to unprecedented heights, investors have viewed it as a positive signal,” he added.