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

A macro view of the fiscal health of States

 
Source:The Hindu

For Prelims: Fiscal deficit, Revenue deficit, Twelfth Finance Commission, GDP, GSDP, Goods and Services Tax (GST).

BE : Budget Estimates, RE : Revised Estimates.

For Mains: Fiscal Responsibility of Indian States.

Highlights of the Article:

  • Fiscal consolidation: Significant reduction in fiscal deficits at Union and State levels in India.
  • Fiscal challenges: Need to address revenue deficits in 13 out of 17 major States.
  • Fiscal implications for macroeconomic stability: Combined fiscal deficit of fiscally stressed States is 3.71% of GSDP, higher than the average.
  • Importance of State finances for growth: Fiscally stressed States contribute 40% to India's GDP and drive public capital expenditures and private investments.
  • Framework for revenue deficit consolidation: Proposals include linking loans to deficit reduction and implementing performance incentive grants.

Context: 

The context of the article is the fiscal health and stability of the States in India. It emphasizes the importance of understanding the finances of individual States to draw accurate conclusions about the overall fiscal situation of the country. 


UPSC EXAM NOTES EDITORIAL ANALYSIS:


1.Introduction:

  • States play a significant role in India's finances, generating over one-third of the total revenue and spending 60% of the government's budget.
  • Analyzing the financial situation of states is crucial for drawing accurate conclusions about the country's fiscal position.

2.Fiscal Imbalance and Consolidation:

  • The fiscal deficits at both the national and state levels have reduced in recent years.
  • The national fiscal deficit decreased from 9.1% of GDP in 2020-21 to 5.9% in 2023-24.
  • State fiscal deficit also declined from 4.1% of GDP in 2020-21 to 3.24% in 2022-23.
  • This reduction reflects improved fiscal prudence and adjustments in expenditure.

3.Challenges in State Finances:

  • Several states continue to face challenges related to revenue deficits.
  • Out of the 17 major states analyzed, 13 states have a revenue deficit in their budgets for 2023-24.
  • Revenue deficit occurs when a state's spending exceeds its regular income.
  • These deficits, especially in states like Andhra Pradesh, Haryana, Kerala, Punjab, Rajasthan, Tamil Nadu, and West Bengal, have implications for fiscal imbalance and debt levels.

4.Implications for Macroeconomic Stability:

  • The fiscal stability of states is crucial for maintaining general government macroeconomic stability.
  • Financially stressed states, which contribute around 40% to India's GDP, have higher fiscal deficits and revenue deficits compared to the national average.
  • These states have been important drivers of public capital expenditures and preferred investment destinations for private investors.
  • Addressing the fiscal challenges in state finances is vital for sustained economic growth.

5.Framework for Revenue Deficit Consolidation:

  • A long-term approach is required to manage revenue deficits and ensure fiscal stability.
  • Linking interest-free loans from the central government to states with a reduction in revenue deficits can discourage diversion of borrowed funds and incentivize deficit reduction.
  • Implementing performance incentive grants can encourage states to focus on reducing revenue deficits.
  • A defined time path for revenue deficit reduction, along with a credible fiscal adjustment plan, can improve fiscal balance and expenditure quality.

6.Conclusion:

  • It is essential to address revenue deficits in state finances for sustainable fiscal stability.
  • The article emphasizes the significance of managing revenue deficits to support overall economic growth.
  • Measures like linking loans to deficit reduction and implementing performance incentive grants can contribute to fiscal consolidation and better state finances.

Practice Questions:

1.How might a macroeconomic perspective on state finances help inform broader fiscal policies and support India's economic growth and stability?

2.What are the long-term fiscal implications of increasing revenue deficit?

3.What are the specific measures that can be taken to consolidate the revenue deficit?

4.What are the roles of the central and state governments in addressing the fiscal challenges facing states?

 

 


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