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An UPhill Task

Yogi Adityanath aims to overhaul UP finances. After the farm loan waiver, will he succeed?
By Anilesh S. Mahajan        Print Edition: August 13, 2017
An Uphill Task: Can Yogi Adityanath turn around the finances of Uttar Pradesh?

Uttar Pradesh Budget is pulling in two opposite directions - populism and austerity. On the one hand, there is the farm loan waiver, announced within days of the BJP government taking charge in March this year but whose precise cost to the exchequer - Rs 36,359 crore - has been made clear only with the announcement of the government's first Budget on July 11. But on the other hand, spending on a number of infrastructure and irrigation projects, some education schemes as well as schemes like the beautification of the Gomti riverside in Lucknow - a pet project of the previous government - has been slashed. There is no allocation even for continuing the much-publicised free laptop distribution scheme of the previous government, though the BJP had promised, in its manifesto, to continue with it.

Stopping the laptop scheme, along with other freebie schemes - such as the stainless steel thalis and tumblers the previous government gave schoolchildren on the last dhanteras day - will save the state Rs 15,000 crore. "The first thing governments do in a fund crunch is to cut down on social sector spending," says Pinaki Chakraborty, Economic Advisor to the 14th Finance Commission. "This will obviously impact the human development index, which in any case is not high in UP." Yet religious tourism has been given a Rs  1,240 crore boost, with further development of Ramayana, Krishna and Buddhist circuits, providing, in particular, better infrastructure in the pilgrimage towns of Ayodhya, Mathura and Sarnath, respectively.


Already, 26 per cent of expenditure goes into paying salaries and another 9 per cent into pensions. This outlay will be even higher once the Seventh Pay Commission's recommendations are implemented; these will cost the exchequer an additional Rs 24,000 crore. The Budget makes no mention of this, nor does it reveal any provision for interest payments and debt repayments inherent in the state having joined the Ujjwal Discom Assurance Yojana (UDAY), which requires it to underwrite its power utilities' debts. With these cuts and omissions, however, UP Finance Minister Rajesh Agarwal has been able to keep the fiscal deficit down to 2.97 per cent - below the limit set by the Fiscal Responsibility and Budget Management (FRBM) Act. Whether he will be able to stick to it is another matter.

Similarly, the Budget is highly optimistic about tax collection, estimating an inflow of Rs 111,502 crore, 24 per cent higher than in the previous year. In its last year in office, the previous government, too, had budgeted for Rs 101,257 crore in taxes, but could realise only Rs 90,219 crore. The new Goods and Services Tax (GST) regime will help since UP, with hardly any industry, has been classified as a "consumption state" - GST is expected to add Rs 8,000-9,000 crore to its commercial tax receipts kitty. Overall, the Budget projects revenues of Rs 3.84 lakh crore in the current year, a rise of 10.4 per cent over the previous financial year.

Centre as Big Brother

UP is the largest state by population, sending 80 MPs to the Lok Sabha, but also one of the most backward. Its per capita income is a measly Rs 48,520 per annum, as against the national average of Rs 94,178. It carries a crushing debt burden - Rs 3,75,049.45 crore in March 2017 - from Rs 2,25,123.59 crore in 2012/13, which in all likelihood will rise if development programmes are to continue. "There are only two ways a state can raise money - get more grants from the Centre or take on debt," says D.K. Srivastava, Chief Policy Adviser, EY. "UP will have to do both." UP's economic health will be crucial to the BJP's performance in the 2019 elections. Prime Minister Narendra Modi has promised "electricity for all" by 2019, and making good on the promise in UP will be vital, along with improving roads and transportation, bolstering agriculture and overhauling industrial policy.

No doubt, Central support - given that the same party is in power at the State and Centre for first time in 15 years - is guaranteed. Central grants for UP, for instance, have been increased by 39 per cent to Rs 68,052 crore for 2017/18, while the increase for most other states is around 5 per cent. NITI Aayog has prepared an "Action Plan for Uttar Pradesh", while leading public sector units such as Powergrid Corporation, NTPC, NHAI, REC, PFC, and FCI are all chipping in and supporting projects in the state. Some of the biggest projects in the state are Centre-funded: the Clean Ganga initiative; the planned airport at Jewar in Greater Noida, along with four smaller ones at Agra, Allahabad, Bareilly and Kanpur; upgrade of the 13 urban centres included in the list of smart cities.


Two of the most backward areas of this backward state are its southern and eastern regions - Bundelkhand and Poorvanchal - and both are receiving special Central attention. Bundelkhand has been battling intermittent drought for the last 15 years. A key project in this region hanging fire since 2005, due to various environmental concerns, was the interlinking of the Ken and Betwa rivers, whose irrigation benefits are expected to be substantial. But with the state and the Centre working in consonance and the prime minister taking personal interest, the project is under way, with the last three months having seen the National Board of Wildlife, the Expert Appraisal Committee and the Forest Advisory Committee - both under the Ministry of Environment, Forests and Climate Change - give their consent to it, albeit with some conditions. Work is expected to be completed in six years.


NITI Aayog has also set deadlines for two other largely Centrally-funded river projects in Bundelkhand: the Bansagar Dam over the Sone River in adjoining Madhya Pradesh, which has to be completed by March 2018, and the Arjun Sahayak project - a network of canals - by December 2019. Two more Centre-backed river projects that will benefit both central UP and Poorvanchal - the Madhya Ganga Canal Phase II and the Sarayu Nahar project - on both of which work had virtually stalled, have been given fresh funds and have to be completed by December 2019. Meanwhile, the state government has been directed to attend to the smaller irrigation works in these areas, focusing on completing existing projects, rather than starting new ones. "Canal irrigation contributes less than 20 per cent to total irrigation in UP, because so many projects have failed," says Subhash Sharma, Director, Centre for Economic Policy Research.

Central handholding is also clearly being seen in UP's road sector. The two expressways linking Bundelkhand and Poorvanchal to Delhi are both being built by NHAI - not the state government - under its new hybrid annuity model, where NHAI puts in 40 per cent investment and a private road developer the rest. The previous Samajwadi Party and Bahujan Samaj Party governments had made the Lucknow-Agra Expressway and the Yamuna Expressway, respectively, the showpiece achievement of their governments. NHAI officials further revealed that they are in the process of taking over the maintenance of 72 state highways, along with three more expressways. NHAI is also building ring roads in 10 major UP cities, including Lucknow, Kanpur, Gorakhpur, Bareilly, Meerut, and Moradabad. This has enabled UP to reduce allocation for roads; it has earmarked only Rs 3,972 crore for upkeep of state highways and another Rs 71 crore for widening roads connecting district headquarters.

"Central spending in UP is understandable and critical to the country's economy in the long run as long as the funds are utilised well," says Srivastava of EY. But B.K. Chaturvedi, former Union cabinet secretary, fears it could lead to financial indiscipline. "Other states will start queuing up with similar requests," he says.

Pressures of Power

In the power sector, UP is close to floating a joint venture with Powergrid Corporation, with equal participation by both, to maintain and augment transmission lines. "Talks are in their final stages," says I.S. Jha, CMD, Powergrid. "We have formed similar joint ventures with Bihar and Odisha's state transmission companies. Such tie-ups enable the state to tap into cheaper debt from agencies such as the World Bank or the Asian Development Bank." Again, this is in contrast to the previous government, which brought private players into transmission through a bidding process, but ran into problems later over financial closures and slow implementation. The SP government had earmarked Rs 23,000 crore for changing old transmission lines, while the latest UP Budget does not allocate even one paisa. UP's power sector is also likely to obtain substantial support from two schemes the Centre has launched - the Integrated Power Development Scheme for better transmission in urban areas and its counterpart for rural areas, the Deen Dayal Upadhyay Gram Jyoti Yojana.

UP's power demand has been estimated at 27,832 MW in 2018/19 by the 19th Electricity Survey of India, which is 10,000 MW more than its current generation capacity. The modest allocation for power in the Budget, as well as cancellations of bids won last year to set up an additional 3,800 MW in the state, suggests that Adityanath would prefer to draw power from the Central pool and ensure smoother coal supplies to existing thermal plants, ensuring they run at full capacity, rather than set up new ones. "UP's generation capacity is nothing to worry about since there are many thermal plants in the country running below capacity from which it can buy power," says Ratul Puri, Chairman, Hindustan Power Projects. "What it needs to do is to make electricity affordable and more easily available by reducing transmission losses and power thefts."

The power legacy Adityanath has inherited is dismal. The UP Power Corporation Ltd (UPPCL), the holding company of the state's five discoms, has estimated that there are 8.5 million illegal connections in the state and another 6.5 unmetered ones in rural areas. UPPCL itself is burdened by a debt of Rs 53,200 crore - which the state has now underwritten thanks to the UDAY scheme - and four of its five utilities - barring Kanpur's - have been ranked the worst performers in the country. "We're setting up 75 police stations dedicated to checking power thefts," says Shrikant Sharma, UP's Power Minister.


Even after restructuring following the introduction of the UDAY scheme, the UP discoms' operational losses have continued to increase, rising from Rs 7,791 crore in 2015/16 to Rs 7,932 crore in 2016/17. Thanks to losses in transit, the gap between the cost of generating and transmitting power and the tariff at which it is sold in UP was once as high as Rs 2.80 per unit. It has since been brought down to around Rs 1, which is still unacceptable. The task of achieving electricity for all by 2019 seems a tall order.

Agriculture Conundrum

The farm loan waiver - which the state government prefers to call "redemption" of loans - will help 21.5 million small and marginal farmers but will do nothing to solve the problems of agriculture in the state. "It will at best provide the farmer temporary relief, giving the government time to work out a proper plan," says Tajamul Haque, former Chairman, Commission for Agricultural Costs and Prices.

Among long-term reforms, the government wants to orient more farmers towards cash crops rather than the subsistence ones for which the state provides a minimum support price. "We want to make cash crops more viable," says Surya Pratap Shahi, UP Agriculture Minister. Prominent among them is oilseeds. UP intends to soon join the National Mission on Oil Seeds and Oil Palm (NMOOP). In April this year, NMOOP guidelines were liberalised to allow 100 per cent corporate investment, including FDI, in oilseed farms. "This will help since we have industrial units in Kanpur with the capacity to process large quantities of oilseeds," says a senior UP official.

A major problem for farmers in Western UP, where sugarcane is the main crop, is late payment by mills. In its manifesto, BJP had promised to ensure payments within 14 days of delivery of the sugarcane at the factory gates, and soon after taking charge, Adityanath gave mill owners a month's window to settle farmers' dues, or else face penal action. Though the crushing season ended in April, dues of around Rs 2,500 crore from 32 mills still remain outstanding. The mills have their own problems of viability which restricts their options. "We're working on a sustainable policy to make the payment schedule more regular," says a senior UP government official. The Budget allocates Rs 273 crore for the promotion of the sugar industry.


Prime Minister Modi has stated that he wants to see farmers' incomes double. To achieve this, the UP government will have to take steps to modernise the state's agriculture. It has announced its intention to set up 20 Krishi Vigyan Kendras, but given that their budget allocation is just Rs 10 crore each, they are unlikely to achieve much. Experts maintain that public investment in agriculture is needed to increase crop yield and expand diversification. The various constraints on UP's Budget - such as the large outlay on interest payments amounting to 18 per cent of total expenditure in the latest budget, or the outgo on employees' salaries - have ensured that the share of expenditure on agriculture and rural development is significantly lower than the national average. Nor is the situation likely to change in coming years. ~

@anileshmahajan

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