Collectively speaking, the state governments spend much more than the Union Government each year but state budgets do not attract the much-required attention that they generally deserve by the financial analysts. If there is any analysis of state budgets, it is merely an academic exercise by the financial market analysts as the bond market investors can neither reward nor punish the states for their imprudence.
- At the aggregate level, the financial implications of state budgets have wider connotations. In this context, the annual study of state government finances by the RBI becomes significant.
- The latest edition shows that the states missed the fiscal deficit target of 3 percent of GDP for the third year in a row.
- Fiscal deficit of states is estimated to be at around 3.1 percent of GDP in 2017-18.
- The financial prudence of Union Government budget has been moderated by the exponential rise of fiscal deficit of the states.
- Post-FRBM, the state governments improved their finances significantly but the 2015-16, 2016-17 and the current budget exceeded the fiscal targets largely due to the takeover of debt of power distribution companies under the UDAY scheme.
- Similarly, shortfall in revenues, implementation of seventh pay commission recommendations and farm loan waivers messed up the financial situation of states.
Reason behind higher fiscal deficit of states
- Fiscal imprudence has led to a rise of revenue expenditure which means that higher fiscal deficit has not augmented any capacity of state in terms of growth. It can be attributed to a sharp increase in salaries of government employees. Similarly, loan waivers also added to this revenue expenditure. High revenue expenditure affects the ability of the state to undertake capital expenditure.
- Raising resources from the bond market can complicate fiscal management and increase redemption pressure in not just medium term but long term finance of the states. Large bond issuances by state governments have resulted in increased complications for the Union Government.
- Proportion of state deficits in the general Government deficit has risen in the last few years. The General Government sector consists of 68 percent of financial resources in the form of gross domestic households’ savings which is about 9 percent of GDP. It gives less room to private sector to raise resources as the government borrowing keeps interest rates high forcing the private sector to borrow from international markets.
Government finances should stabilise with the introduction of GST, India should also pursue sound fiscal policies both at the state and Union level to avoid crowding out of resources for the private sector. It will enable higher investment and create jobs for the youth that we all strive to achieve.
Source – Livemint
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