Virendra Singh Rawat: Will Akhilesh's cycle make UP fly?

Last Updated: Wed, Jul 11, 2012 19:30 hrs

Talking to reporters after presenting his maiden Budget, Uttar Pradesh Chief Minister Akhilesh Yadav had underlined the fact that the state fiscal deficit was within the stipulated three per cent of the gross state domestic product (GSDP) and would remain so.

He was responding to persistent questions about the state’s fiscal health and the likely burden on the exchequer if the populist schemes listed in the manifesto of the Samajwadi Party (SP), the symbol for which is the cycle, were to be implemented.

Yet, barely four months in office, Yadav has realised that it would take more than just financial prudence to deliver the goods. So, it is no surprise that his government is urging the Centre for a Rs 90,000-crore package.

Sample this: The annual payout of the ruling SP poll promises would cost the exchequer Rs 60,000 crore, a little less than the Rs 62,000 crore projected as state tax revenue for this fiscal.

The distribution of free tablets and laptop alone will cost the exchequer around Rs 4,500 crore, given that nearly 5 million students will graduate class X (2.8 million) and XII (1.9 million).

Where will it find the money for this? This year, the fiscal deficit is projected to rise to 2.96 per cent from 2.93 per cent the previous fiscal. GSDP is pegged at Rs 728,342 crore and the government is targeting 10 per cent annual growth during the 12th Plan, up from 7.5 per cent during the just concluded 11th Plan. The disaggregated targets for this period are not unambitious either: industrial growth at 11.2 per cent and services growth at 11.9 per cent, agricultural growth rate at five per cent and employment for 10 million people.

To clock such breakneck growth at a time when even the central government is wary of making any firm projections at all, the state needs a humungous amount of private investment, which experts peg at over Rs 10 lakh crore.

Now here’s the problem: the state has little headroom to fund its development and infrastructure projects required to attract private investment, let alone spend on its populist schemes. The 2012-13 state Budget size has breached Rs 2 lakh crore but public debt is estimated to increase by Rs 18,000 crore to Rs 2.3 lakh crore.

Worse, UP has a propensity to use borrowed funds for servicing debt. In its latest report, the Comptroller and Auditor General (CAG) indicated that 92 per cent of borrowed funds in UP were used for discharging debt liabilities between 2008 and 2011. The CAG report also pointed out the fiscal deficit fell to 2.93 per cent during 2010-11 mainly due to low capital expenditure.

“The present fiscal situation in UP is not too bad. However, crisis may develop later if the revenue growth projections do not materialise,” Giri Institute of Development Studies Director A K Singh told Business Standard.

The government squirms at the low credit-deposit ratio (CDR) and credit-investment deposit ratio of UP at around 48 per cent and 58 per cent respectively. This suggests the low capital formation and investment capacity of the state economy. Unless the industrial sector picks up, the CDR will remain low and savings would continue to fly out.

That is why private sector investment is key to the state’s development, especially given the urgent need to create jobs and take pressure off the state exchequer to fulfil a poll promise of a yearly dole. SP’s unemployment dole promise saw crazy scenes at the state employment exchanges after the party dethroned the Mayawati government.

Private investment and big industries would, for instance, go a long way to reinvigorate the 3-million strong micro, small and medium enterprises (MSME) in UP, which is already up against high interest rates, general slowdown, recession in key European markets, Chinese imports, and the chronic lack of infrastructure.

Initially, industry and business had welcomed the change of guard in the state, placing their hopes on an IT-savvy chief minister. Indeed, Yadav had started out on the right foot by meeting some senior industrialists — Adi Godrej, Shiv Nadar, Malvinder Mohan Singh, A M Naik and even Bill Gates. But after less than four months in office, Yadav appears to have squandered this goodwill. Critics and detractors have put the government in dock for its poor handling of the power situation, which has resulted in long power cuts in even big urban centres, worsening law and order situation and some policy flip-flops.

But Yadav appears to be showing few signs of addressing any of the issues that would spur growth and bolster revenues. For instance, one rallying point for industry would have been if the chief minister had agreed to presiding over Udyog Bandhu (the state government’s industry interface). This would have enabled him to deal with their problems first-hand and also give him a feel for industry.

At a time when Indian states are fierce competitors for private investment, chief ministers can no longer afford to ignore economic development in the interests of factional politics. Like Nitish Kumar, his counterpart in Bihar, Yadav has the opportunity to earn himself some lasting political capital by pulling the state out of its backwardness. Instead, he seems to be banking heavily on populism, a route that could eventually bankrupt the struggling state.

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