Mains Marathon

Approach:

• Introduction: Start your answer with brief introduction of Fiscal Stability
• Body: Mention various factors because of which the states are facing fiscal stability issue, their implications and ways to enhance states’ fiscal stability
• Conclusion: Summarize the key points and conclude

Answer:

Fiscal stability refers to the ability of a government to manage its revenues and expenditures in a prudent and sustainable manner, without compromising its macroeconomic objectives and public service delivery. Fiscal stability is essential for promoting economic growth, reducing poverty and inequality, and ensuring intergenerational equity.

An assessment of successive Finance Commissions since the Twelfth Finance Commission identified three States, i.e., Kerala, Punjab and West Bengal, as fiscally stressed States. The number of States that are now fiscally stressed has increased to seven (measured in terms of the level of revenue deficit).

However, many states in India face fiscal stability issues due to various factors such as:

• Slowdown in own tax revenue growth due to the impact of GST, economic slowdown, and COVID-19 pandemic.
• High share of committed expenditure on salaries, pensions, interest payments, and subsidies, leaving little fiscal space for capital and developmental spending.
• Rising debt burden due to higher borrowing requirements, especially after the implementation of UDAY scheme for power sector reforms and the relaxation of fiscal responsibility legislation (FRL) norms in the wake of COVID-19.
• Lack of transparency and accountability in reporting off-budget borrowings and contingent liabilities, such as guarantees given to state-owned enterprises and public-private partnerships.
• The practice of offering freebies or populist schemes such as free electricity, water, food grains, laptops, bicycles, loan waivers, etc. by political parties during election campaigns or after coming to power.
  • According to various reports, expenditure on freebies range from 0.1 - 2.7 per cent of gross state domestic product (GSDP) for different states. 

These fiscal stability issues have adverse implications for the economy and public services, such as:

• Crowding out of private investment and lower credit ratings due to high debt servicing costs and fiscal risks.
• Lower quality and quantity of public goods and services, such as infrastructure, health, education, and social welfare, due to inadequate capital expenditure and maintenance outlays.
• Higher regional disparities and social unrest due to unequal distribution of resources and opportunities among states.
• Reduced fiscal autonomy and flexibility for states to respond to shocks and pursue their development priorities.

Ways to enhance fiscal performance and sustainability of states:

• Strengthen their revenue mobilisation by improving tax compliance, expanding tax base, rationalising tax rates and exemptions, diversifying non-tax sources, and leveraging digital technology.
• Prioritise their expenditure by reducing wasteful and unproductive spending, enhancing efficiency and effectiveness of public service delivery, increasing capital outlays for growth-enhancing sectors, and targeting subsidies to the needy.
• Manage their debt prudently by adhering to the FRL targets, availing concessional financing from multilateral agencies, swapping high-cost debt with low-cost debt, and avoiding off-budget borrowings and contingent liabilities.
• Enhance their fiscal transparency and accountability by disclosing all relevant fiscal information in a timely and comprehensive manner, adopting outcome-based budgeting and performance indicators, conducting regular audits and evaluations, and engaging with stakeholders.

Fiscal stability is a key determinant of the economic and social well-being of a state. States in India face several challenges in achieving fiscal stability due to structural and cyclical factors. However, by implementing appropriate fiscal policies and reforms, states can improve their fiscal performance and sustainability, thereby contributing to the overall development of the country.