{"id":1756,"date":"2023-07-05T00:00:00","date_gmt":"2023-07-05T00:00:00","guid":{"rendered":"https:\/\/www.nextias.com\/current_affairs\/uncategorized\/05-07-2023\/the-fiscal-health-of-states\/"},"modified":"2023-07-05T00:00:00","modified_gmt":"2023-07-05T00:00:00","slug":"the-fiscal-health-of-states","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/editorial-analysis\/05-07-2023\/the-fiscal-health-of-states","title":{"rendered":"The Fiscal health of States"},"content":{"rendered":"


\n<\/p>\n

The Fiscal health of States<\/u><\/span><\/span><\/span><\/h1>\n

Syllabus: GS2\/ Polity and Governance\u00a0<\/strong><\/span><\/span><\/span><\/p>\n

In Context<\/u><\/strong><\/span><\/span><\/span><\/p>\n

    \n
  • It has been observed that States’ fiscal health improved after Covid-19 pandemic stress.<\/span><\/span><\/span><\/li>\n<\/ul>\n

    Fiscal position of States<\/u><\/strong><\/span><\/span><\/span><\/p>\n

      \n
    • Size of the State\u2019s revenue & expenditure<\/strong><\/span><\/span><\/span>\n
        \n
      • In India, the States mobilise altogether<\/span><\/span><\/span> more than a third of total revenue<\/strong><\/span><\/span><\/span>, <\/span><\/span><\/span>spend 60% of combined government expenditure<\/strong><\/span><\/span><\/span>, and have a share in government borrowing that is around 40%.\u00a0<\/span><\/span><\/span><\/li>\n
      • Given the <\/span><\/span><\/span>size of the fiscal operation of States,<\/strong><\/span><\/span><\/span> an up-to-date understanding of their finances is critical in order to draw evidence-based inferences on the fiscal situation of the country\u00a0<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n
      • Receding fiscal deficit:<\/strong><\/span><\/span><\/span>\n
          \n
        • It is becoming evident that the<\/span><\/span><\/span> increase in general government deficit<\/strong><\/span><\/span><\/span> and <\/span><\/span><\/span>debt <\/strong><\/span><\/span><\/span>that occurred during the COVID-19 pandemic has begun to recede.\u00a0<\/span><\/span><\/span><\/li>\n
        • There have been<\/span><\/span><\/span> significant post-pandemic fiscal corrections<\/strong><\/span><\/span><\/span> at the Union and State levels.\u00a0<\/span><\/span><\/span>\n
            \n
          • At the <\/span><\/span><\/span>Union level, <\/strong><\/span><\/span><\/span>the fiscal deficit declined from 9.1% of GDP in 2020-21 to 5.9% in 2023-24 (BE).\u00a0<\/span><\/span><\/span><\/li>\n
          • All<\/span><\/span><\/span> State fiscal deficit<\/strong><\/span><\/span><\/span> was 4.1% of GDP in 2020-21. It declined to 3.24% of GDP in 2022-23 (RE).\u00a0<\/span><\/span><\/span><\/li>\n
          • For the<\/span><\/span><\/span> major States<\/strong><\/span><\/span><\/span>, for the year 2023-24 (BE), it is expected to be 2.9% of GDP.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n
          • Data collection:<\/strong><\/span><\/span><\/span>\n
              \n
            • The analysis here is based on the data collated from the<\/span><\/span><\/span> individual Budgets of 17 major States<\/strong><\/span><\/span><\/span>.\u00a0<\/span><\/span><\/span>\n
                \n
              • These States are responsible for<\/span><\/span><\/span> more than 90% of the combined spending<\/strong><\/span><\/span><\/span> of all States.\u00a0<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n
              • Thus, fiscal issues emerging out of their Budgets are representative of the State finances in India.\u00a0<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n
              • Fiscal consolidation<\/strong><\/span><\/span><\/span>\n
                  \n
                • The analysis shows that these States together have managed to contain their fiscal deficits. This fiscal consolidation is significant in many ways.\u00a0<\/span><\/span><\/span>\n
                    \n
                  • States in aggregate <\/strong><\/span><\/span><\/span>managed to be fiscally prudent despite a significant contraction in revenues even during the peak of COVID-19.\u00a0<\/span><\/span><\/span><\/li>\n
                  • Emergency provision for health spending <\/strong><\/span><\/span><\/span>and <\/span><\/span><\/span>livelihood <\/strong><\/span><\/span><\/span>during the COVID-19 pandemic was not easy and required Union-State fiscal coordination.\u00a0<\/span><\/span><\/span><\/li>\n
                  • States were<\/span><\/span><\/span> able to reprioritise expenditure<\/strong><\/span><\/span><\/span> and <\/span><\/span><\/span>quickly contain<\/strong><\/span><\/span><\/span> the fiscal deficit.\u00a0<\/span><\/span><\/span><\/li>\n
                  • The <\/span><\/span><\/span>reduction in fiscal deficit<\/strong><\/span><\/span><\/span> is a combination of expenditure-side adjustments, improved Goods and Services Tax (GST) collection and higher tax devolution due to buoyant central revenues.\u00a0<\/span><\/span><\/span><\/li>\n
                  • Non-GST revenues<\/strong><\/span><\/span><\/span> are also showing signs of recovery after the pandemic in most States.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n
                    \n\n\n\n
                    \n

                    N K Singh Committee’s Recommendations on Fiscal Deficit<\/u><\/strong><\/span><\/span><\/span><\/p>\n

                      \n
                    • The N.K. Singh panel to review India\u2019s fiscal discipline rules has recommended a debt-to-GDP ratio of 38.7% for the central government, 20% for the state governments together and a fiscal deficit of 2.5% of GDP (gross domestic product), both by financial year 2022-23.<\/span><\/span><\/span>\n
                        \n
                      • The debt-to-GDP ratio<\/strong><\/span><\/span><\/span> is the ratio of a country\u2019s debt to its gross domestic product (GDP).<\/span><\/span><\/span>\n
                          \n
                        • A high debt-to-GDP ratio is undesirable for a country, as a higher ratio indicates a higher risk of default.<\/span><\/span><\/span>\u00a0<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

                          Challenges<\/u><\/strong><\/span><\/span><\/span><\/p>\n

                            \n
                          • Absence of aggregating fiscal data:<\/strong><\/span><\/span><\/span>\n
                              \n
                            • Due to the absence of aggregation of individual State Budget data, a consolidated view of general government finances is not readily available.\u00a0<\/span><\/span><\/span><\/li>\n
                            • Every year, this data becomes available <\/span><\/span><\/span>only after the publication of the Reserve Bank of India\u2019s (RBI) Annual Study<\/strong><\/span><\/span><\/span> on State Finances.\u00a0<\/span><\/span><\/span><\/li>\n
                            • Aggregating fiscal data from individual State Budgets is <\/span><\/span><\/span>rigorous and time consuming<\/strong><\/span><\/span><\/span>.\u00a0<\/span><\/span><\/span>\n
                                \n
                              • Hence, the timeline of this publication by the RBI is during the second half of the fiscal year.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n
                              • Containing the revenue deficit of States:<\/strong><\/span><\/span><\/span>\n
                                  \n
                                • The reduction in fiscal deficit has <\/span><\/span><\/span>not been accompanied by a corresponding reduction in revenue deficit<\/strong><\/span><\/span><\/span>.\u00a0<\/span><\/span><\/span>\n
                                    \n
                                  • As of 2023-24 (BE), out of 17 major States, 13 States have deficit in the revenue account.\u00a0<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n
                                  • Out of 13 States, fiscal deficits in<\/span><\/span><\/span> seven States are primarily driven by revenue deficits<\/strong><\/span><\/span><\/span>; the States being Andhra Pradesh, Haryana, Kerala, Punjab, Rajasthan, Tamil Nadu, and West Bengal. They also have large debt to GSDP ratios.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n
                                  • Long-run implications of fiscal stress:<\/strong><\/span><\/span><\/span>\n
                                      \n
                                    • An assessment of <\/span><\/span><\/span>successive Finance Commissions<\/strong><\/span><\/span><\/span> since the Twelfth Finance Commission identified<\/span><\/span><\/span> three States, i.e., Kerala, Punjab and West Bengal, as fiscally stressed States<\/strong><\/span><\/span><\/span>.<\/span><\/span><\/span><\/li>\n
                                    • Increasing revenue deficit driving the fiscal imbalance has long-run fiscal implications and there is a <\/span><\/span><\/span>need to correct this imbalance <\/strong><\/span><\/span><\/span>in the revenue account.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n

                                      Suggestions & way ahead<\/u><\/strong><\/span><\/span><\/span><\/p>\n

                                        \n
                                      • On the question of revenue deficit,<\/span><\/span><\/span> a long-run view is also necessary<\/strong><\/span><\/span><\/span>.\u00a0<\/span><\/span><\/span><\/li>\n
                                      • The re-emergence of revenue deficit in recent years should take the focus back on the <\/span><\/span><\/span>management of revenue deficit <\/strong><\/span><\/span><\/span>by creating an<\/span><\/span><\/span> incentive compatible framework<\/strong><\/span><\/span><\/span>.\u00a0<\/span><\/span><\/span>\n
                                          \n
                                        • The <\/span><\/span><\/span>following measures can be considered<\/strong><\/span><\/span><\/span>.<\/span><\/span><\/span>\n
                                            \n
                                          • Interest-free loans to the States<\/strong><\/span><\/span><\/span> by the Union Government, if continued, may be linked to a <\/span><\/span><\/span>reduction in revenue deficit<\/strong><\/span><\/span><\/span>.\u00a0<\/span><\/span><\/span>\n
                                              \n
                                            • This will help eliminate the possibility of a substitution of States\u2019 own capital spending and also prevent the diversion of borrowed resources to finance revenue expenditure.\u00a0<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n
                                            • A <\/span><\/span><\/span>defined time path for revenue deficit reduction<\/strong><\/span><\/span><\/span> with a credible <\/span><\/span><\/span>fiscal adjustment plan<\/strong><\/span><\/span><\/span> would help restore fiscal balance and improve quality of expenditure.<\/span><\/span><\/span><\/li>\n
                                            • A <\/span><\/span><\/span>forward-looking performance incentive grants <\/strong><\/span><\/span><\/span>could also be considered for a reduction of revenue deficit.\u00a0<\/span><\/span><\/span>\n
                                                \n
                                              • In this context, different approaches provided by earlier Finance Commissions can be considered to decide the framework of the incentive structure.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n
                                              • A comprehensive revenue deficit reduction framework is essential to improve the fiscal health of States.<\/span><\/span><\/span><\/li>\n
                                              • In conclusion, we need to get the focus back on the management of revenue deficit. For this, a macro view is essential.<\/span><\/span><\/span><\/li>\n<\/ul>\n
                                                \n\n\n\n
                                                \n

                                                Mains Practise Question<\/u><\/strong><\/span><\/span><\/span>\u00a0<\/span><\/span><\/span><\/p>\n

                                                [Q<\/strong><\/span><\/span><\/span>] How far do you agree with the view that the fiscal stability of State finances is critical to ensure higher State-specific growth ? What measures can be undertaken for the management of the revenue deficit of states in India?<\/span><\/span><\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

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                                                The Fiscal health of States Syllabus: GS2\/ Polity and Governance\u00a0 In Context It has been observed that States’ fiscal health improved after Covid-19 pandemic stress. Fiscal position of States Size of the State\u2019s revenue & expenditure In India, the States mobilise altogether more than a third of total revenue, spend 60% of combined government expenditure, […]<\/p>\n","protected":false},"author":1,"featured_media":1757,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[22],"tags":[52],"class_list":["post-1756","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-editorial-analysis","tag-polity-and-governance"],"acf":[],"jetpack_featured_media_url":"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2023\/07\/4358840images.jpg","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/1756","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=1756"}],"version-history":[{"count":0,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/1756\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media\/1757"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=1756"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=1756"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=1756"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}