Has product subsidy become a burden to Telangana economy?

Since its formation, Telangana’s growth performance has been impressive, but it has performed modestly across development dimensions and parameters. The per capita income of the state is one of the highest in the country. The state has the advantage of witnessing demographic transition early, leading to faster decelerated population growth, which has also contributed to an increase in per capita income, along with GDP growth. The rate of growth in terms of value added (GVA) or GSDP and per capita income is one of the highest across states.

Performance of the economy:

The per capita GSDP of the state ranks fifth among all states and UTs and third among major states after Goa and Delhi. Growth in GVA, GSDP, and per capita GSDP is also one of the highest. Its contribution to India’s GDP is five per cent, which is 1.8 times higher than its share in the country’s population.

While GSDP has grown at a near constant rate of 6.3 per cent annually between 2014-15 and 2024-25, its nominal growth rate is at 11.4 per cent. The difference between the real and nominal rate of growth in GSDP is its price deflator (inflation). The growth of the price deflator, which indicates GDP growth due to rise in prices vis-à-vis rise in output, is 5.1 per cent.

Telangana’s growth performance is better than the All-India percentage in terms of GSDP. Meanwhile, one must note that the inflationary pressure is high as also the growth in price deflator.

The state gross value added (GVA) in Telangana constitutes about 90-92 per cent of its GSDP. Moreover, the GVA growth rate, both real (6.2 per cent) and nominal (11.5 per cent), along with the growth in its GVA price deflator (5.3%), is approximately the same as that of State’s GSDP during the decade.

The product taxes or the indirect taxes in Telangana contribute 10-12 per cent of its GSDP, whereas the state’s product or item subsidies are worth about 2-2.5 per cent of GSDP. Its growth in product taxes and subsidies is also considerably higher than the national average. The real growth in product taxes during the decade is three percentage-points higher than the national average while its growth in product subsidies is double that of the national average.

Indirect taxes’ growth:

The real product taxes or indirect taxes in Telangana have grown at a higher rate (8.5 per cent) than its GVA, but the nominal growth in taxes is almost the same as GVA (11.7 per cent) between 2014-15 and 2024-25. The growth in the state’s product tax price deflator is 3.4 per cent, which is two percentage points less than the growth in its GVA price deflator. It is explicit that the inflationary effect on product taxes is considerably low.

Furthermore, a high growth in product taxes suggests high product tax buoyancy in the state’s economy, which is on a high growth trajectory. High growth in product taxes could either be due to an increase in such a tax base or an improvement in the efficiency of tax collection. Additionally, growing consumerism and increased expenditure on consumption in the state economy may have also contributed to higher product tax revenues. The tax buoyancy in Telangana is significantly higher than that observed at the national level.

The major sources of product taxes are goods and services tax (GST), state value added tax (VAT) on sale of petroleum products (@35.2 per cent on petrol and 27 per cent on diesel), state VAT on sale of alcoholic beverages (liquor), state motor vehicle tax (life tax, green tax and short-term tax), stamps and registrations, electricity taxes and duties, and professional tax (on professions, trades, callings and employment). Despite implementation of GST and its transition glitches, along with a revenue loss from the sales tax regime, the state’s performance is better, ostensibly due to state petroleum VAT, stamps and registrations, and liquor taxes.

The Telangana government has, in fact, revised and increased the valuation of land and other properties for stamps and registration duties. Under RERA (Real Estate, Regulation and Development Act) 2016, a considerable portion of real estate, especially housing transactions, is subject to GST. The state’s per capita liquor consumption is one of the highest in India. The number of liquor shop licenses has increased considerably.

Growing subsidy burden:

The growth in the state’s product subsidies in during the last decade is further higher, in both real (13.1 per cent) and nominal (16.4 per cent) terms, than that of the state GVA and its product taxes, while the growth in subsidies’ price deflator remained the same as that of GVA’s price deflator (3.4 per cent). The real growth in product subsidies is 4.5 percentage points higher than growth of product taxes and 6.5 points higher than the growth of the GVA.

This scenario indicates that product subsidies are growing faster than product taxes, resulting in a rising burden on the state’s economy. The real value of subsidies in Telangana accounts for 6.6 per cent of total subsidies in the country. Its contribution to subsidies in India is 1.5 times higher than its contribution to the national GVA/GDP and 2.4 times higher than the state’s share in the country’s population.

The contribution of real growth of GVA is 89.4 per cent to the real growth in State’s GSDP. This is one percentage-point less than its share in the GSDP. Nearly 15.6 per cent of real growth in GSDP emerges from a growth in product taxes. At the same time, as there is a growth in product subsidies, this offsets the growth in product taxes. About a five percentage-point increase in product taxes or GVA is offset by the growth in product subsidies. The contribution of real growth in product taxes to GSDP growth exceeds its share in the GSDP. However, such growth contribution of product taxes to growth in GSDP is neutralised by the growth in product subsidies.

The state government’s product subsidies include free rice distribution under PDS, water charges, electricity subsidy to farmers and domestic consumers, various input subsidies to agriculture, bus fare subsidies to students and now for all women passengers, LPG cylinder subsidies, and minimum support price (MSP). All these subsidy schemes are considered to promote social and economic welfare.

Besides these product subsidies, there are production subsidies provided to the firms or producers. They include tax holidays and other exemptions for industries which have financial implications to state revenue, interest free or low interest loans, bank loan waiver, even the farmer investment support under the rythu bharosa are some among others. Such production subsidies do contribute to the growth of the production of firms or agriculture. On the other side they also cost the state exchequer.

There needs to be a balance between the productivity of taxes and subsidies. In the context of streamlining the tax system through GST and the recent reduction of tax rates in GST 2.0, which may reduce tax revenue growth prospects, meeting such subsidies may become a matter of concern.

(The writers are from the Centre for Economic and Social Studies, Hyderabad)