States fiscal deficit on the rise | RSTV Debate Summary

Fiscal deficit trends in India have shown a big reversal and the situation is expected to get worse in the future. Comparing it with the earlier trends, states seemed fiscally prudent until about three years ago from now than the Centre. They are now having larger fiscal deficits and facing financial difficulties.

Reasons for higher fiscal deficits

Three key issues raises our fiscal concerns –

  • The wave of farm loan waivers across the states has raised Fiscal deficit further.
  • Interest liabilities of the member states of UDAY Scheme would be a matter of concern.
  • Prohibition of liquor along the highways and bars has affected excise revenues of few States.

Analysis –

  • This vicious cycle of debt continues in the form of more fiscal deficit for States, the more they will have to arrange borrowings from the market.
  • In the age of cooperative federalism, Union Government has acted liberally towards the State Governments in terms of expenditure management and fiscal deficit managment. Most of the times, the quality or pattern of expenditure is not managed properly. In the past the money was spent on capital expenditure and most of the revenue expenditures were taken care by the central schemes and some by the states themselves.
  • As the direction of fiscal deficit is set for the entire year in the beginning, hence, there is not much left to manoeuver in the middle of the financial year as a particular borrowing pattern has already been decided by the states. Until the next Finance Commission reorganizes the finances of states, the situation seems very unlikely to change or get better.
  • GST impact will now start showing up. Hence, the states will have to be very cautious about keeping their fiscal space in order to manage their fiscal deficit figures. As the states are borrowing more, the banking and insurance sector will be dipping into this lending pool more and ultimately reach the brink of collapsing under the burden of bad debts.
  • Similarly, the corporate bond market might face hardening of rates because a state paper with a sovereign guarantee (UDAY bond) seems much more attractive for the investors like banking and insurance companies to dip into than other offerings.
  • There is a strong possibility of crowding out of private borrowings from the market due to scavenging of resources by public borrowings to meet financial targets. This vicious cycle once started would force the private sector to offer higher rate of interests to stay competitive in the market. This would adversely affect the overall economy.
  • When the Seventh Pay Commission comes into picture, the burden will be much exorbitant on the states to manage. Apparently, there are some compensations offered by the GST Council to states for the next 5 years, which might seem helpful to the states in short term.

Conclusion –

UDAY Scheme is significant because it is the need of the hour to bring the debt burden of public sector electricity companies into the books as well as shelving them off to secure a prudent financial future. This fiscal imprudence over fiscal matters through loan waivers would cost the states and the country much more in formulating the monetary policy, growth and expenditure management strategies. Similarly, the losses from liquor ban are being recovered by imposing additional taxes over and above GST like in Maharashtra and Tamil Nadu, but they defeat the very purpose of GST. It is high time for the States to realise that they need to be efficient with their spending patterns, otherwise the liabilities they are adding today would become untenable tomorrow.

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