The Reserve Bank of India (RBI) recently published an annual report entitled “State Finances: A Study of Budgets of 2019-20”. This report offers crucial data, in-depth analysis, and a comprehensive assessment of the fiscal health of state governments in India. The report highlights key findings concerning general fiscal deficit, potential concerns, major challenges, and valuable suggestions for fiscal improvement.
Fiscal Deficit: Status Quo and Future Predictions
According to the report, states’ Gross Fiscal Deficit (GFD) consistently stayed within the threshold of 3% GDP as per the Fiscal Responsibility and Budget Management Act (FRBM) during the financial years 2017-18 and 2018-19. For the budget of 2019-20, states have consolidated a GFD of 2.6% of GDP.
Outstanding Debt Concerns
The RBI study underscores that the outstanding debt of states has witnessed a significant jump over the last five years, escalating to 25% of GDP. It identifies this upsurge in debt as a fundamental fiscal challenge that needs to be addressed promptly and effectively.
Critical Challenges: Revenue Prospects and Unrealistic Revenue Forecasts
States’ revenue prospects are currently affected by several factors including low tax buoyancies, diminishing revenue autonomy under the Goods and Services Tax (GST) framework, and unpredictability tied to Integrated GST (IGST) transfers and grants. Thus, states often resort to expenditure compression in even the most productive and employment-generating sectors due to unrealistic revenue forecasts in budget estimates.
| Years | Gross Fiscal Deficit | Outstanding Debt |
|---|---|---|
| 2017-2018 | Within 3% | 20% |
| 2018-2019 | Within 3% | 22% |
| 2019-2020 | 2.6% | 25% |
The Fiscal Responsibility and Budget Management (FRBM) Act
The FRBM Act was introduced in 2003 with an aim to set clear targets for the government to cut down fiscal deficits. Even though these targets have been deferred on various occasions, the government formed a committee under NK Singh in May 2016 to review the FRBM Act. As per the committee’s recommendations, the government should aim to reduce the fiscal deficit to 3% of GDP by March 31, 2020, bring it down to 2.8% in 2020-21, and further lower it to 2.5% by 2023.
Understanding Fiscal Deficit
Fiscal Deficit is a useful economic measure that is calculated as the difference between a government’s total income (total taxes and non-debt capital receipts) and its total expenditure. This difference represents the total borrowings needed by the government to bridge the gap between income and expenditure. It bears mentioning that borrowings are not included while computing the total revenue.
Types of Fiscal Deficit
There are two types of fiscal deficit: Gross Fiscal Deficit and Net Fiscal Deficit. Gross Fiscal Deficit refers to the excess of total expenditure over revenue receipts (including external grants) and non-debt capital receipts. Net Fiscal Deficit, on the other hand, is Gross Fiscal Deficit reduced by the net lending of the Central government.
