Post polls, four states, one economic challenge

The clear results of the recent assembly elections – be it the emphatic return of the incumbent in Assam or the ringing out of the old in West Bengal, Tamil Nadu and Kerala — underscore the need for the new governments to urgently address the problems plaguing the economies. The most pressing task is to raise the rate of economic growth. Of the four states, only Assam has done well enough, registering a compound annual growth rate of 11.4 per cent between 2014-15 and 2023-24. Over the same period, Tamil Nadu’s economy expanded by 10.3 per cent while the growth rates of Kerala (8.6 per cent) and West Bengal (9.1 per cent) could not even reach double digits. For perspective, between 2004 and 2026, India’s overall CAGR has been 12.3 per cent. This shows that even Assam could improve and grow much faster, not to mention West Bengal and Kerala, which are effectively dragging back India’s overall growth rate because of their sluggish growth.

Data shows that all the four states are increasingly burdened by debt and rising levels of interest payments. Typically, states are allowed to borrow money but such borrowings are better spent on the creation of productive assets such as roads and ports — the kind of investment that will boost growth and allow the state to pay back the borrowing through higher tax collection in the future. But a look at the revenue deficits shows that be it Kerala, West Bengal or Tamil Nadu, all three states have been borrowing money just to pay for their day-to-day expenses such as salaries and pensions. A more recent challenge has been posed by the increase in unconditional cash transfers by state governments. In Assam, 4.3 per cent of revenue receipts go towards such transfers; West Bengal is worst at 10 per cent.

Debt-ridden government finances and slow economic growth are two sides of the same coin. Governments that borrow recklessly to pay for unproductive schemes actively weaken economic growth. The growth rate in per capita GDP — far slower than the growth rates of overall GDP — as well as uncomfortable levels of unemployment are a reflection of the stresses building up in the system. These mandates should be seen as an opportunity to correct the course.