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Approach:

  1. Explain how India’s fiscal centre of gravity has rapidly shifted from the Centre to the States.
  2. Mention the status of fiscal discipline of the states and the reasons behind it.
  3. Enumerate recommendations of the N. K. Singh panel.

Centre’s fiscal discipline is often subjected to intense public scrutiny. This belies the fact that India’s fiscal centre of gravity has rapidly shifted from the Centre to the States, as at present, the State Governments account for about 60% of total government expenditure.

The Fiscal Responsibility and Budget Management (FRBM) Rules in the last decade helped State Governments improve their fiscal performance significantly. According to the Fourteenth Finance Commission (FFC), the Gross Fiscal Deficit of the States came down from the level of 3.3% of GDP in 2004-05 to 2.4% of GDP in 2014-15. During the same period, the Centre was unable to meet its fiscal targets. However, the situation seems to have reversed with Centre showing more fiscal discipline and States showing less fiscal prudence due to:

  • Rise in expenditure: States’ fiscal deficit is rising because of a rise in current expenditure. This trend is expected to continue due to implementation of the 7th Pay Commission Report, under-provisioning of interest payment for schemes such as Ujwal DISCOM Assurance Yojna (UDAY).
  • Lack of capacity: States need to build their administrative capacity to check wastage and pilferage at the implementation level.
  • Populist measures such as Farm-loan waivers undertaken in different states. Increasing states’ borrowings: if the current trend continues, by Financial Year 19, states’ market borrowings would exceed that of the Centre’s borrowings.

Ideally, fiscal condition of the States should have improved due to increased States’ share in union taxes from 32% to 42% in line with the Finance Commission recommendations. However, this is not the case. In this light, the key recommendations of the N.K. Singh panel on Fiscal Responsibility and Budget Management Act are:

Debt Management and Fiscal Responsibility Bill, 2017 to replace the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act).

  • Debt to GDP ratio: It suggested using debt as the primary target for fiscal policy instead of fiscal deficit. A debt to GDP ratio of 60% should be targeted & achieved by 2023.
  • Fiscal Council: It proposed to create an autonomous Fiscal Council with a role of preparing multi-year fiscal forecasts, improving quality of fiscal data, advising the government if conditions exist to deviate from the fiscal target, and advising the government to take corrective action in case of non-compliance.
  • Deviations: It suggested that grounds on which the government can deviate from the targets should be clearly specified with no scope of adding further exceptions.
  • Debt trajectory for individual states: 15th Finance Commission should be asked to recommend the debt trajectory for individual states.
  • Borrowings from the RBI by the government should be done only under certain circumstances. Fiscal indiscipline causes crowding out of private investment due to increase in cost of borrowings and diminishes chances of credit-ratings upgrade. Thus, the issue of state governments managing their finances deserves very serious attention and priority action.
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