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EDITORIAL ANALYSIS:Utilize fiscal room to ramp up capital spending

Source: Indian Express

 

  • 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 Rs2. 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

  1. 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)

  1. Do you agree that the Indian economy has recently experienced recovery ? Give reasons in support of your answer.(UPSC 2021)

(200 WORDS, 10 MARKs)