FISCAL DEFICIT OF STATES - ECONOMY
News: States’
gross fiscal deficit likely to decline to 3.4% of GDP in FY23: RBI report
What's in the news?
● According
to an RBI study on State finances, the fiscal health of States has improved
from a sharp pandemic-induced deterioration in 2020-21 on the back of a
broad-based economic recovery and high revenue collections with their gross
fiscal deficit (GFD) budgeted to decline from 4.1% of gross domestic product
(GDP) in 2020-21 to 3.4% in 2022-23.
Key takeaways:
● While
State's debt is budgeted to ease to 29.5
% of GDP in 2022-23 as against 31.1% in 2020-21, it is still higher than
the 20% recommended by the N.K. Singh Committee for reviewing FRBM Act in 2018,
warranting prioritization of debt consolidation.
Fiscal Deficit:
● Fiscal
deficit is the difference between the total income of the government
(total taxes and non-debt capital receipts) and its total expenditure.
● It
is a measure of government borrowing in
a year.
● It
is to be noted that while calculating the total revenue, borrowings are not
included.
Impact of High Debt to GDP ratio:
● Crowding
out effect.
● Major
part of the budget goes to interest payments.
● Poor
ratings by credit rating agencies.
● Higher
borrowing cost.
FRBM Target by N. K. Singh Committee:
● Debt-to-GDP ratio:
Bringing down the debt-to-GDP ratio of the center to 40% and that of states to
20% by 2024-25.
Measures needed:
● To
crowd in private investment, the state governments may continue to focus on creating a congenial ecosystem for the
private sector to thrive.
● States
also need to encourage and facilitate higher
inter-state trade and businesses to realize the full benefit of spillover
effects of State capex across the country.
Go back to basics:
N. K. Singh Committee Recommendations on FRBM Act:
● The
NK Singh Committee proposed to create an autonomous Fiscal Council with a chairperson and two members to be appointed
by the center. The Fiscal council's responsibilities would include
○ preparing
multi-year fiscal forecasts,
○ recommending
changes to the fiscal strategy,
○ improving
the quality of fiscal data,
○ advising
the government if conditions exist for deviating from the fiscal target, and
○ advising
the government to take corrective action if the Bill is not followed.
● The
committee recommended that the 15th Finance Commission should be asked to recommend
the debt trajectory for individual
states.
● Bringing
down the debt-to-GDP ratio of the center to 40% and that of states to 20% by
2024-25.
● Target
commitments could be deviated under certain circumstances such as a national
calamity, war, agricultural collapse, structural reforms in the economy and the
real output is less than 3% etc.
● Monetary
and fiscal policies should complement each other and help accomplish economic
stability and growth.