EDITORIAL ANALYSIS : A macro view of the fiscal health of States

Source: The Hindu

• Prelims: Indian Economy(GDP, GVA, fiscal policy etc)
• Mains GS Paper III: Fiscal policy, Monetary policy, GDP, Issues related to planning etc.

ARTICLE HIGHLIGHTS

• In India, the States mobilize more than a third of total revenue, spend 60% of combined government expenditure, and have a share in government borrowing that is around 40%.

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

Difference between Fiscal and Monetary Policy:

Types of Fiscal Policy:

Fiscal imbalance and consolidation of states:

• First quarter of the fiscal year 2023-24: increase in general government deficit and debt that occurred during the COVID-19 pandemic has begun to recede.
• There have been significant post-pandemic fiscal corrections at the Union and State levels.
  • Union level: The fiscal deficit declined from 1(nine point one)% of GDP in 2020-21 to 5.9(five point nine)% in 2023-24 (BE).
  • All State fiscal deficit: It was 1(four point one)% of GDP in 2020-21. It declined to 3.24(three point two four)% of GDP in 2022-23 (RE).
  • For the major States(year 2023-24 (BE)):it is expected to be 9(two point nine)% of GDP.

What does the sharp reduction in fiscal deficit suggest?

• We cannot have an impressionistic view of the fiscal situation of the country, especially on the finances of States.

Fiscal health of States:

• This data becomes available only after the publication of the Reserve Bank of India’s (RBI) Annual Study on State Finances.
• The timeline of this publication by the RBI is during the second half of the fiscal year.

Analysis from the individual Budgets of 17 major States:

• These States are responsible for more than 90% of the combined spending of all States.
• These States together have managed to contain their fiscal deficits.

Significance  of fiscal consolidation of States:

• States in aggregate managed to be fiscally prudent despite a significant contraction in revenues even during the peak of COVID-19.
• Emergency provision for health spending and livelihood during the COVID-19 pandemic was not easy and required Union-State fiscal coordination.
• States were able to reprioritise expenditure and quickly contain the fiscal deficit.
• The reduction in fiscal deficit is a combination of expenditure-side adjustments, improved Goods and Services Tax (GST) collection and higher tax devolution due to buoyant central revenues.
• Non-GST revenues are also showing signs of recovery after the pandemic in most States.

Fiscal challenges:

• Containing the revenue deficit of States: The reduction in fiscal deficit has not been accompanied by a corresponding reduction in revenue deficit.
  • As of 2023-24 (BE): out of 17 major States, 13 States have deficits in the revenue account.
  • Out of 13 States, fiscal deficits in seven States are primarily driven by revenue deficits;
  • They also have large debt to GSDP ratios.
• Mere presence of a revenue deficit cannot be considered as a sign of fiscal profligacy.
• For seven States, their specific shares of revenue deficit in fiscal deficit for 2023-24 are: Andhra Pradesh (40.9%), Haryana (50.9%), Kerala (60.4%), Punjab (70.7%), Rajasthan (39.7%), Tamil Nadu (40.8%), and West Bengal (47%).
  • The all-State share of revenue deficit in fiscal deficit for the same year is expected to be 27%.
• An assessment of successive Finance Commissions: The Twelfth Finance Commission identified three States, i.e., Kerala, Punjab and West Bengal, as fiscally stressed States.
  • The number of States that are now fiscally stressed has increased to seven (measured in terms of the level of revenue deficit).

Analysis of fiscal health of these states in comparison to other states:

• The combined fiscal deficit of these States is 3.71(three point seven one)% of GSDP when the all-State average for the same is 2.9%
• Their combined revenue deficit is 2.15(two point one five)% of GSDP, when the all-State revenue deficit is 78(zero point seven eight)%
• Their combined debt ratio is higher than the Finance Commission recommended debt ratio for all States for the year 2023-24.
• These States together contribute around 40% to India’s GDP.
• Some of these States have also been big drivers of public capital expenditures and favored investment destinations of private investors.

Way Forward

• Increasing revenue deficit driving the fiscal imbalance has long-run fiscal implications and there is a need to correct this imbalance in the revenue account.
• Interest-free loans to the States by the Union Government, if continued, may be linked to a reduction in revenue deficit.
  • This will help eliminate the possibility of a substitution of States’ own capital spending and also prevent the diversion of borrowed resources to finance revenue expenditure.
• A defined time path for revenue deficit reduction with a credible fiscal adjustment plan would help restore fiscal balance and improve quality of expenditure.
• A forward-looking performance incentive grant could also be considered for a reduction of revenue deficit.
  • Different approaches provided by earlier Finance Commissions can be considered to decide the framework of the incentive structure.
• Need to get the focus back on the management of revenue deficit.
  • For this, a macro view is essential.

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)