- Prelims:Indian Economy(GDP, GVA, fiscal policy etc)
- Mains GS Paper III:Fiscal policy, Monetary policy, GDP, Issues related to planning etc.
ARTICLE HIGHLIGHTS
- With the global economic environmenttaking a turn for the worse, with demand slowing down in advanced economies and continued aggressive monetary tightening by central banks.
- How effectively states ramp up their spending will have a critical bearing on the pace the Indian economy grows at in the second half of the year
INSIGHTS ON THE ISSUE
Context
Fiscal policy:
- The fiscal policy is concerned with the raising of government revenue and Government Budget increasing expenditure.
- To generate revenue and to increase expenditures, the government finance or policy called Budgeting policy or fiscal policy
The major fiscal measures are:
- Public Expenditure
- Taxation
- Public Borrowing
Analysis of fiscal spending of states:(based on 13 major state governments- that account for 85 per cent of India’s GDP)
- These states actually have the fiscal space to ramp up capital spending significantly Rs7.4(seven point four)trillionthis year.
- ICRA estimates: combined revenue deficit of these states at Rs 2.1(two point one)trillion, higher than what has been budgeted for.
Resources available to states for funding their fiscal deficit:
- Unconditional market borrowings:3.5(three point five)percent of their gross state domestic product (GSDP)
- Additional borrowing: Linked to the completion of power sector reforms (0.5(zero point five)percent of GSDP) and the interest-free capex loan provided by the Center.
Off-budget borrowing:
- The off-budget borrowings by states refer to loans taken by its entities, special purpose vehicles, etc.
- They are expected to be serviced through the state government’s own budget: Instead of the cash flows or revenues generated by the borrowing entity.
- The Union government recent clarification: Off-budget borrowings would be considered as borrowing of the state government and would be subject to the provisions of Article 293(3)
- The Center would be adjusting the incremental off-budget borrowings: raised by the state governments in 2021-22 from their net borrowing ceiling over a one to four-year period, beginning in 2022-23 and ending in 2025-26.
Challenges for states:
- States’ revenue prospects are confronted with:
- Low tax buoyancies
- Shrinking revenue autonomy under the Goods and Services Tax (GST) framework
- Unpredictability associated with transfers of the Integrated GST (IGST) and grants.
Problems faced by the States in raising resources:
- Limited space for borrowing:Their borrowing space too is limited by the fiscal responsibility and budget management limit of 3% of Gross State Domestic Product (GSDP).
- High yield on the State bonds:Faced with an acute fund crunch, Kerala floated 15-year bonds but was faced with a huge upsurge in the yield to 8.96%.
Way Forward
- Tax devolution and GST compensation grants: They are likely to exceed the amount budgeted by the states this year.
- This will not fully offset the estimated shortfall in other revenues and the projected higher-than-budgeted revenue expenditure in this year.
- Based on estimates:13 states will have adequate resources to fully fund and/or exceed their budgeted capex this year.
- For others, however, that may not be the case.
- Actual capital spending by these states: It has been rather disappointing.
- Dilemma about whether their capex will exceed the budgeted level, despite ample fiscal space to do so.
QUESTION FOR PRACTICE
- Explain the difference between combusting methodology of India’s Gr Domestic Product (GDP) before the year 2015 and after the year 2015.(UPSC 2021)
(200 WORDS, 10 MARKS)
- Do you agree that the Indian economy has recently experienced recovery ? Give reasons in support of your answer.(UPSC 2021)
(200 WORDS, 10 MARKS)
