One can see frequent advertisements by the Government of Uttar Pradesh these days which claim, among other things, that it is a fiscally surplus state. I am not sure whether politicians and officials there understand the real implications of fiscal surplus. They may be influenced by an accounting mind-set (and not by an economic framework) and that may be encouraging them to see fiscal surplus as a virtue in all situations. 

Does Uttar Pradesh have enough school teachers? Does it have enough public healthcare centres? Do government hospitals in the state have enough doctors and facilities to provide medical treatment to its people, especially poorer ones? Is there adequate social security for its older people who have worked as agricultural and informal-sector workers? If the answer is no to these questions, then fiscal surplus is economically and morally unacceptable. 

The fiscal surplus of a state implies that the government can spend something more even without borrowing. More spending is desirable when there are socially useful avenues to spend public resources. Moreover, spending by the government even by borrowing money can be useful if it is carried out carefully. When people don’t have capabilities to participate in market economy productively, governments can borrow and spend money to enhance these capabilities. The participation of more capable people with higher productivity may help them to generate higher incomes. These people and their governments can depend on this higher income-stream in future to pay back loans. Hence borrowing by the government need not be intrinsically bad (if it is careful in spending the borrowed money). 

In fact, such borrowing is good for individuals too. If a family can take a loan and use for the higher education of children (and if children attempt to study well in colleges), it can enhance its socioeconomic status. Not borrowing money for education (due to the fear or personal or family norm) can be counter productive. I can see some people unwilling to borrow even if it can enhance their socioeconomic status, and that should be treated as a behavioural trait which is not good for development. Though one need not worry about such norms of a few people, such a `prudence’ on the part of governments can be socially harmful. 

However I am not surprised by the fact that Uttar Pradesh has fiscal surplus. Rather than seeing it as a virtue, it demonstrates that the democracy of the state does not create enough pressures on the government to spend money on important social priorities. When schools do not have enough teachers, when public healthcare centres do not have enough facilities and staff, and when poor people do not have enough money to survive during their old age, democracy usually compels political parties (irrespective of their ideological backgrounds) to meet these social needs. When governments are forced to spend money for these purposes, there will be an improvement in human development. 

It is through this process that human development has gone up in Kerala and Tamil Nadu. In both these states, intense competition in politics encouraged both parties/coalitions to spend more money (not only using what is available with the government but also by borrowing) on education, healthcare and social security. These may have crossed the borrowing limit that is recommended by norms of fiscal responsibility. 

It is the absence of this process that keeps the human development not so desirable in Gujarat though its government has a lot of public resources through the process of industrialisation. It is not surprising that the UP is following the Gujarat model. There are elements in UP politics that may not generate enough pressures from below on the government to spend money. 

There are residuals of elite capture in UP politics. Though middle-class, and middle- and lower-caste politicians are active in state politics, there are villages and constituencies where the local rich may have an undue influence in determining political and electoral agenda, and the poor and less affluent people may serve as vote banks. 

All sections of non-elites are not adequately empowered through political mobilisations. Dalits may not have an adequate voice when the BJP or SP governments are in power. Minorities may have challenges when the BJP is in power. Politics is also not that competitive. This is not only due to the dominance of one or other party at the state level. 

Truly competitive politics requires an ability for an ordinary voter to connect with different parties. If one party is not able to deliver what she expects, she should be in a position to credibly communicate to the other that it can expect her support if what she wants is delivered. This is not so possible when the politics is fragmented along caste and religious lines. A Dalit voter may not be able to connect with the party which represents the middle-caste. A minority voter may not be in a position to connect with the BJP based on its economic policies. All these reduce the pressures on government to spend money for public purposes. 

The focus on big-ticket infrastructure (and not on social security) through public-private partnership as a way to signal private investors or to show off visible symbols of development may encourage state-governments to have fiscal surplus. It becomes a signal to private investors in infrastructure that the government is in a financially sound position to pay back loans. 

The limited understanding of the functioning of economy among government officials can be a reason for this focus on surplus. They view the government as an organisation and are interested in balancing its revenues and expenditures. These revenues and expenditures are different from social costs and benefits. In an attempt to balance revenues and expenditures, they may neglect the maximisation of net social benefits or surplus or social welfare. 

End Note: The content and opinions expressed are that of the author, and are not necessarily endorsed by/do not necessarily reflect the views of Azim Premji University