Kerala, Tamil Nadu and West Bengal have been fiscally stressed for a considerable period of time, and there are no easy ways to mobilise revenues to meet the cost of the promised freebies, particularly in the prevailing difficult economic scenario, points out M Govinda Rao.
Key Points
- Newly elected state governments now face mounting fiscal pressure while attempting to implement expensive election promises and welfare guarantees.
- Kerala, Tamil Nadu, West Bengal already carry high debt burdens with limited fiscal room for additional spending.
- Rising energy prices and economic uncertainty linked to the West Asia war may further strain state finances and revenues.
- Political parties across states increasingly rely on cash transfers, subsidies, and welfare guarantees to secure electoral victories.
- Economists warn excessive freebies may reduce growth-oriented capital expenditure and weaken long-term human development investments.
Now that the elections in the four states are over, the focus of the newly elected governments shifts to governance.
Having promised large giveaways in their manifestos, the reality of limited fiscal space and the questions on the feasibility of implementing those promises will now take precedence.
The challenge of implementing them is bound to be formidable because these states are already fiscally stressed.
In addition, the ongoing West Asia war is likely to have considerable direct and indirect adverse effects on revenues as well as on energy and other input prices.
The opportunity cost of these promised transfers and subsidies is high, as they could displace long-term spending that accelerates growth and enables human empowerment.
Of the four states where elections were held, there is a regime change in three, and only in Assam there is continuity.
A common factor across all four states is that the winning political parties made exorbitant promises to appeal to voters.
It is in implementing these promises that they will have to confront the fiscal reality.
Ironically, three of the four states -- Kerala, Tamil Nadu and West Bengal -- have been fiscally stressed for a considerable period of time, and there are no easy ways to mobilise revenues to meet the cost of the promised freebies, particularly in the prevailing difficult economic scenario.
With the same party ruling in both the state and the Centre, Assam and West Bengal are likely to receive a more sympathetic treatment from the Union government.
The new government in Tamil Nadu has also been avoiding confrontationist rhetoric.
However, the Union government itself will face a severe fiscal crunch due to the ongoing war in West Asia, and will have limited capacity to loosen the purse strings.
In any case, the challenge of fulfilling the promises made by the newly elected state governments without adversely impacting the quality of services provided will be formidable.
Elections in India have become fertile ground for the proliferation of freebies. Every political party thinks it is the only way to come to power and invents new forms of subsidies and transfers.
The Sixteenth Finance Commission drew attention to this fast-growing trend of cash transfers when it stated, 'The unconditional transfers have grown at a rate of 28.8 per cent between 2018-19 and 2025-26 BE.' (Para 14.30)
And, '....unconditional transfers are also witnessing a rapid geographical expansion, with an increasing number of states embracing them as the preferred instrument of transfers.' (14.32).
All political parties, without exception, have been making tall promises in their manifestos to win elections, and once elected, those promises come back to haunt them.
The story of the three newly elected governments in Kerala, Tamil Nadu and West Bengal is no different. The three states have little fiscal room to manoeuvre.
The revenue deficit as a ratio of their respective gross state domestic products (GSDP) is currently at 2.1 per cent for Kerala, 1.5 per cent for Tamil Nadu, and 2.4 per cent for West Bengal, constituting 77 per cent, 47 per cent, and 60 per cent of their fiscal deficits, respectively.
This implies that about 50 to 70 per cent of the borrowed funds are being spent on meeting revenue expenditures.
Debt Burden Mounts In States
The interest payments in these states constitute almost 20 per cent of their revenue receipts. The outstanding liabilities as a ratio of their GSDP were 37 per cent in Kerala, more than 30 per cent in Tamil Nadu, and over 40 per cent in West Bengal.
In addition, according to the Sixteenth Finance Commission, in Kerala, there are off-budget borrowings, and the outstanding debt of the Kerala Infrastructure Investment Fund Board in March 2025 amounted to Rs 28,880 crore.
In the case of Tamil Nadu, the outstanding loan of the state power distribution company was Rs 1.73 trillion in 2023-2024 (Table 13.2; p.283).
Yet freebies galore.
In its 40-point manifesto, the Tamilaga Vettri Kazhagam party has promised a monthly payment of Rs 2,500 to every woman; six free gas cylinders; 200 units of free power; free transport in government buses; eight grams of gold and a silk saree to girls for their weddings; a gold ring for a newborn child; unemployment support of Rs 4,000 per month for every graduate and Rs 2,500 for every diploma holder; free coaching for competitive examinations; and medical insurance up to Rs 25 lakh for every family, among other promises.
Finding resources for these promises is going to be a challenge when the state has almost Rs 10 trillion in outstanding liabilities in the budget and another Rs 2 trillion liabilities in the power distribution sector.
Poll Guarantees Raise Fiscal Concerns
In Kerala, the United Democratic Front has promised to implement five guarantees, which include an increase in social welfare pensions to Rs 3,000 every month; free bus travel for women in government buses; a monthly allowance of Rs 100 for every college-going female student; health insurance of Rs 25 lakh per family; and interest-free business loans of up to Rs 5 lakh for young entrepreneurs.
In West Bengal, the Bharatiya Janata Party, which has come to power in the state, has promised in its manifesto to implement dearness allowance in accordance with the Seventh Pay Commission award for employees and pensioners; create 10 million new jobs; provide Rs 3,000 per month in support for women; and fix support prices for rice, mangoes, and potatoes.
In Assam, too, the ruling party has promised to provide 200,000 government jobs and increase the aid amount to low-income families under the Orunodoi Scheme to Rs 3,000 in a phased manner.
While these freebies win elections, they are likely to prove costly and can be implemented only at the expense of growth-enhancing capital expenditure and human development.
This type of populism could spread to other states as well, unless it is shown that factors other than freebies at the cost of growth are more important in determining electoral outcomes.
M Govinda Rao is former director, National Institute of Public Finance and Policy. The views are personal
Feature Presentation: Aslam Hunani/Rediff
