Day 12 – Q 4.How are the states placed in terms of managing their budgets? How important is it to update state-level fiscal responsibility legislation? Examine.

4. How are the states placed in terms of managing their budgets? How important is it to update state-level fiscal responsibility legislation? Examine. .  

बजट के प्रबंधन के संदर्भ में राज्यों की स्थिति कैसी है? राज्य–स्तरीय राजकोषीय जिम्मेदारी कानून को अद्यतन करना कितना महत्वपूर्ण है? जांच करें।

Introduction:

• To advance rather than defer the desirable goal of fiscal prudence, India like several other countries, embarked in the mid-2000s on an ambitious project of fiscal consolidation, adopting fiscal rules aimed at curbing fiscal deficits and imbalanced sharing of revenues.
• Budgeting is the process of allocating finite resources to the prioritized needs of an organization. In most cases, for a governmental entity, the budget represents the legal authority to spend money.  

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Position of States in terms of managing their budget

• In 2018-19, states are expected to spend 72% more than the central government, a significant change from 46% in 2014-15 (last year of the 13th Finance Commission).  Thus, much of the expenditure that affects citizens is decided at the level of the state. Meanwhile, decisions on receipts are getting centralised at the level of the centre with the implementation of the GST.
• Most of the states depend on the centre for the large chunk of their revenue. There are different channels through which the centre transfer funds to states like Finance Commission(FC). Besides, the Gadgil-Mukherjee formula and Finance Commission formula also does the same.

According to the The report released by  Reserve Bank of India (RBI) titled “State Finances: A Study of Budgets of 2019-20”, States’ Gross Fiscal Deficit (GFD) has remained within the Fiscal Responsibility and Budget Management Act (FRBM) threshold of 3% of Gross Domestic Product (GDP) during 2017-18 and 2018-19. For 2019-20, States have budgeted a consolidated GFD of 2.6% of GDP.

• In 2018-19, 52% of the revenue receipts of states is estimated to come from their own revenue, and the remaining 48% of the revenue in the form of transfers from the centre. 
• Outstanding debt of states have risen over the last five years to 25 per cent of GDP.
• Some states spend more on Agriculture and some on industries. Eg Karnataka had become the first State in the country to come out with an exclusive Budget for Agriculture.

Importance of updating state level fiscal responsibility legislation

• Fiscal Responsibility Acts are important for fiscal prudence and better public expenditure quality.
• Adoption of fiscal policy rules built under responsibility legislation commits the government to a deficit or debt reduction path.
• The institutional framework of the fiscal legislation facilitates effective monitoring of fiscal performance of the government and encourages pursuit of fiscal management policies aimed at transparency, efficiency, responsibility, fairness and stability.
• The policies under fiscal responsibility seek to enhance the credibility of the Government through actions, which indirectly result in reduction of interest rate on borrowings of the state government, and take initiatives for growth in GSDP (Gross State Domestic Product), leading to a decline in debt-GSDP ratio.

Conclusion

While such legislations cannot be panacea for all fiscal ills and moreover, have their own drawbacks, but they provide a basis for political consensus to accomplish complex economic tasks and thereby enhance the credibility of the Government. Therefore, these policies should be aimed at being internally consistent and “not conflict with each other” and flexible to adapt to exogenous shocks.