The two states together have reportedly demanded over Rs 1.30 lakh crore from the Centre, a sum which Sitharaman would find extremely hard to dole out despite a record tax collection drive and a special dividend of Rs 2.1 lakh crore gouged from the country’s central banker - the Reserve Bank of India. They have also asked for a number of concessions including easier loans and relaxation of a cap on borrowing by states.

However, provisions for loans and market borrowing are areas where negotiations are likely to have been completed to give the two vital allies sufficient political leeway to win some cheers from their supporters back home. While the Telegu Desam Party Supremo Chandrababu Naidu met Prime Minister Narendra Modi earlier this month to press his case, JD (U) chieftain and Bihar chief minister Nitish Kumar’s team met the finance minister last week, possibly to remind her of the party's demands, which were first voiced when the regional outfit did yet another somersault to join the NDA in January this year.

The Political Logic of Demands

Besides seeking funds to build Amravati, the new capital of Andhra, the Polavaram irrigation project and money to build Bihar’s crumbling road and bridge infrastructure, the two powerful chief ministers want norms to be relaxed so that they can borrow more money from the market and take easy fresh loans to clear past overdue debts.

Though the amounts demanded sound huge – Rs 1 lakh crore for a new capital and other infrastructure projects from Naidu alone – the reality is that both chief ministers want their money in doable bits and bytes. However, even the annual tranches for these mega-projects too are huge and will be a drain on the central kitty. 

For Amravati alone, the money sought in the first year is Rs 15,000 crore. To justify such huge payouts for just one state will be a political headache for the ruling coalition, especially in the face of a strident opposition which now has some strength in the lower house and will certainly delve deep into the budget. 

Naidu, who has made a comeback in his home state of Andhra Pradesh, by winning a majority in the state legislature and 16 Lok Sabha seats, has emerged as a crucial ally of the BJP, along with Kumar who has some dozen Janata Dal (United) MPs in the lower house.

The two regional parties together account for nearly 10 per cent of the total strength of 292 that the NDA enjoys in India’s equivalent of the House of Commons.   

The support of these two parties is crucial to the stability of the NDA coalition government, as despite the BJP winning the largest chunk of 240 seats in Lok Sabha, the halfway mark needed to form a government could only be cobbled with the help of allies. 

Some of what the BJP-led coalition government may announce to satisfy its partners was written into the fine print of the interim budget, possibly as a result of pre-election discussions with the two major allies.

What Is Doable For The Centre

In the interim budget for 2024 presented this February, Sitharaman had budgeted for an outlay of Rs 1.3 lakh crore for a 50-year-interest-free capital expenditure loan to states. She also announced a similar 50-year loan sans interest but with strings attached to support state governments for programmes linked to ‘Viksit Bharat’.

There is, of course, scope to improve on these numbers now that the RBI and PSU companies have paid their dividends. And if the two states which are ruled by allies can manage to corner a chunk of the money from the corpus of these two mega-funds then that could help inject a measure of stability into this government’s functioning. 

The demand for a special category status for states like Bihar is however unlikely to be accepted. The Centre will, in all likelihood, pass the buck on to the Finance Commission as it feels it can't keep giving sops to more and more states.

However, other demands will therefore have to be given even more careful consideration to keep the alliance partners happy.  

The demand to raise the borrowing limit beyond the ceiling of 3 per cent of state GDP which both states have made, is a popular one. In fact, the opposition-ruled Tamil Nadu, Kerala and Karnataka have been raising similar demands for some time now. 

There is a logic to the demand too, as the combined expenditure of states on social services including health and education during 2022-23 stood at a hefty Rs 19.18 lakh crore. Compared to this spending by the states, the central government spent just Rs 2.23 lakh crore on these heads during the same period. 

The states thus spent some 8.6 times the money spent by the central government on services that matter most to ordinary people. Economists and opposition leaders have been arguing that given the limited ability of states to tax, it would be more than fair to give them the right to borrow to spend on their citizens.  

The issue of raising borrowing limits temporarily is also not without precedence. It was raised during Covid times for instance. However, the problem lies with the ability of states to repay loans. States' debt to GDP has been rising and a dozen states, including Bihar, Andhra, Kerala, West Bengal, and Uttar Pradesh had debt-GDP ratios ranging from 30 per cent to 53 per cent in 2023-24.   

On top of that many states have been understating their fiscal deficit, by indulging in various off-budget borrowings. 

However, states like Bihar and Andhra which suffered division of their states with the mineral-rich portions being carved out into new states have seen their GDP growth rates tapering off and do possibly need some form of help to raise their people’s standard of living. 

The question that arises is how much of this extra money the Centre will be willing to concede. And more importantly, what logic will it offer for giving away just those very sops to states ruled by its allies which it has been denying to opposition-ruled states in the past?