Syllabus: GS3/Economy
Context
- A recent decadal analysis by the Comptroller and Auditor General (CAG) reveals how Indian States are managing their finances — balancing growth, welfare, and sustainability.
About the Macro Fiscal Health of Indian States
- It refers to the overall financial stability, efficiency, and sustainability of State-level public finances.
- It’s a composite measure that evaluates how States in India manage their revenues, expenditures, deficits, and debt, and ensures adequate investment in development sectors like health, education, and infrastructure.
Key Dimensions of Macro-Fiscal Health
- Revenue Mobilization:
- Own Revenue: Income from State taxes (e.g., VAT, excise) and non-tax sources (e.g., royalties, lotteries).
- Transfers from Centre: Devolution of central taxes and grants-in-aid.
- Expenditure Quality:
- Revenue Expenditure: Day-to-day costs like salaries, subsidies, and interest payments.
- Capital Expenditure: Long-term investments in infrastructure and development.
- Deficit and Debt Management:
- Fiscal Deficit: The gap between total expenditure and revenue (excluding borrowings).
- Revenue Deficit: When revenue expenditure exceeds revenue receipts.
- Debt-to-GSDP Ratio: Indicates a State’s ability to repay its debt.
- Developmental Spending: It includes allocations for health, education, rural development, and welfare.
- States with strong fiscal health maintain high developmental outlays relative to their GSDP.
Government Assessment Tools
- Fiscal Health Index (FHI) 2025 by NITI Aayog: Evaluates 18 major States in terms of their contribution to India’s GDP, demography, total public expenditure, revenues, and overall fiscal stability.
- Top Performers: Odisha, Chhattisgarh, Goa, Jharkhand.
- Struggling States: Punjab, Andhra Pradesh, West Bengal, Kerala.
- CAG’s Decadal Analysis: It tracks trends in borrowing, revenue sources, and expenditure patterns.
- It highlights how States finance deficits — often through loans and bonds that must be repaid with interest.
- For Key Findings of CAG’s Decadal Analysis, please follow the link
Analysing CAG’s Decadal Report of Macro Fiscal Health of Indian States
- Revenue Surplus vs Fiscal Reality: Uttar Pradesh recorded a surprising revenue surplus of ₹37,000 crore, more than double that of Gujarat.
- However, this surplus was largely driven by central transfers, not internal revenue generation.
- Only about 42% of UP’s revenue came from its own sources, raising concerns about fiscal autonomy.
- Vertical Fiscal Imbalance: States like Maharashtra generated nearly 70% of their revenue internally, while poorer States relied heavily on the Centre.
- It affects States’ ability to plan and invest independently, especially in welfare and infrastructure.
- Borrowing Trends: Many States were deep in deficit, spending far more than they earned, in the early 2000s.
- Over the decade, borrowing patterns shifted, with States increasingly relying on market loans and bonds to finance deficits.
- Expenditure Priorities: Need for higher capital spending (roads, hospitals, schools) rather than excessive routine expenditure (salaries, subsidies).
- It emphasized that fiscal choices directly impact public services — like whether a school gets enough teachers or a hospital receives new equipment.
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