Hindu Editorial Analysis : 5-July-2023

The Covid-19 pandemic had a significant impact on the fiscal health of states in India. However, recent data suggests that states have made remarkable progress in improving their fiscal position. This essay will examine the fiscal situation of states, the measures taken to achieve fiscal consolidation, challenges faced, and the long-run implications of fiscal stress.

Fiscal Position of States:
  1. Size of Revenue and Expenditure:
    • States in India mobilize more than a third of the total revenue.
    • They account for 60% of combined government expenditure.
    • State borrowing constitutes around 40% of the government’s borrowing.
    • Understanding the finances of states is crucial to assess the overall fiscal situation of the country.
Receding Fiscal Deficit:
  1. Fiscal Corrections at Union and State Levels:
    • Union-level fiscal deficit declined from 9.1% of GDP in 2020-21 to 5.9% in 2023-24 (BE).
    • State fiscal deficit decreased from 4.1% of GDP in 2020-21 to 3.24% of GDP in 2022-23 (RE).
    • Major states are expected to achieve a fiscal deficit of 2.9% of GDP in 2023-24 (BE).
Data Collection:
  1. Analysis Based on Major States:
    • Data analyzed from the budgets of 17 major states responsible for more than 90% of the combined spending.
    • Findings from these states represent the overall state finances in India.
Fiscal Consolidation:
  1. Prudent Fiscal Management:
    • States managed to contain their fiscal deficits despite a contraction in revenues during the pandemic.
    • Emergency provisions for health and livelihood required Union-State fiscal coordination.
    • States reprioritized expenditure and swiftly contained fiscal deficits.
    • Fiscal consolidation achieved through expenditure-side adjustments, improved GST collection, and higher tax devolution.
    • Non-GST revenues also showing signs of recovery in most states post-pandemic.
Challenges:
  1. Absence of Aggregated Fiscal Data:
    • Lack of consolidated view of general government finances due to the absence of aggregated state budget data.
    • RBI’s Annual Study on State Finances, published during the second half of the fiscal year, provides this data.
    • Aggregating fiscal data from individual state budgets is rigorous and time-consuming.
  2. Revenue Deficit of States:
    • Reduction in fiscal deficit not accompanied by a corresponding reduction in revenue deficit.
    • 13 out of 17 major states have deficits in the revenue account.
    • Seven states (Andhra Pradesh, Haryana, Kerala, Punjab, Rajasthan, Tamil Nadu, and West Bengal) have fiscal deficits primarily driven by revenue deficits.
    • These states also have high debt-to-GSDP ratios.
Long-Run Implications of Fiscal Stress:
  1. Fiscally Stressed States:
    • Kerala, Punjab, and West Bengal identified as fiscally stressed states by successive Finance Commissions since the Twelfth Finance Commission.
  2. Increasing Revenue Deficit:
    • The long-run fiscal implications of an increasing revenue deficit are significant.
    • Correcting this imbalance in the revenue account becomes essential.
Why In News

After the Covid-19 pandemic, there has been a noticeable improvement in the fiscal health of various states. The economic recovery efforts and increased government spending have contributed to this positive trend, leading to a strengthened financial position for many regions.

MCQs about Improving Fiscal Health of States

  1. Which major states are expected to achieve a fiscal deficit of 2.9% of GDP in 2023-24?
    A. Kerala, Punjab, and West Bengal
    B. Andhra Pradesh, Haryana, and Rajasthan
    C. Tamil Nadu, Kerala, and West Bengal
    D. Andhra Pradesh, Rajasthan, and West Bengal
    Correct Answer: B. Andhra Pradesh, Haryana, and Rajasthan
    Explanation: For the year 2023-24, these major states are expected to achieve a fiscal deficit of 2.9% of GDP.
  2. What is one of the challenges faced in assessing the fiscal situation of states?
    A. Lack of aggregated fiscal data
    B. Excessive revenue deficit
    C. Insufficient expenditure adjustments
    D. Limited tax devolution
    Correct Answer: A. Lack of aggregated fiscal data
    Explanation: The absence of aggregated state budget data makes it challenging to have a consolidated view of general government finances.
  3. Which states have been identified as fiscally stressed states?
    A. Andhra Pradesh, Kerala, and Punjab
    B. Kerala, Punjab, and West Bengal
    C. Tamil Nadu, Rajasthan, and West Bengal
    D. Haryana, Kerala, and Rajasthan
    Correct Answer: B. Kerala, Punjab, and West Bengal
    Explanation: The successive Finance Commissions have identified these three states as fiscally stressed states.

Boost up your confidence by appearing our Weekly Current Affairs Multiple Choice Questions

Loading