Keeping in mind the role played by the states’ finances in affecting the macro-economic stability in India; highlight the issues with States’ fiscal management in India.

The FRBM act has mandated target for fiscal deficit for centre as well as states. Fiscal Deficit is the difference between total revenue and total expenditure of the government.

Fiscal deficit = Total budget expenditure – Total budget receipts excluding borrowings

It shows the borrowing requirements of the government during the budget year.

Significance of state finances for macroeconomic stability in India:

• States being primary driver of service delivery in general have profound impact on stability of Indian economy.
• Increase in debt of states causes reduction in India’s suitability for investment from foreign investors.
• States collectively form a big chunk of India’s budget expenditure and revenue.
• Wasteful expenditure by states may lead to increase in inflation and disruptions in market.
• Target for states are specifically defined through FRBM because in a federal arrangement states’ share of finances involves responsibility too.
• A cap of 20% debt to GDP ratio and 3% of fiscal deficit coupled with elimination of revenue deficit has been the target to increase the resilience of Indian economy.
• Farm loan waivers, freebies & various populist schemes damage the credit culture, market formation and professionalism to a great extent.

Issues with States’ fiscal management:

• Despite being revenue surplus, the concern is that revenue has not increased but expenditure has decreased.
• Capital expenditure is declining and remains at abysmal value.
• Focus on populism damages the prospects of Indian economy.
• Poor budgetary allocations and informal way of budget spending leads to huge wastage.
• Politicization and segmental allocation lead to disruption in societal balance.
• Monitoring and oversight lacks, leading to reduced implementation at ground level.
• Management of finances is very dismal leading to loss in revenue.
• Not enforcing property tax, providing concessions, etc lead to constraints in funds.

States are equal participants of India’s growth trajectory and hence need to share equal responsibility along with centre to protect Indian economy from problems and ensure long-term macroeconomics sustainability with visible growth in Indian economy.

Topics: GS-II: Functions and Responsibilities of the Union and the States • GS-III: Economic Growth Development