Fiscal Health of the States

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A comprehensive revenue deficit reduction framework is essential to improve the fiscal health of the states.

fiscla health of states 1

State mobilises more than 0ne-third of total revenue, spend 60% of combined government expenditure.
Around 40% in Government borrowing is shared by the states of India.
At the Union level, the fiscal deficit declined from 9.1% of GDP in 2020-21 to 5.9% in 2023-24.
All State fiscal deficit declined to 3.24% of GDP in 2022-23 from 4.1% of GDP in 2020-21.
For the major States, fiscal deficit is expected to be at 2.9% of GDP in 2023-24.

Fiscal prudence of the States- The states in aggregate managed to be fiscally prudent despite a significant contraction in revenues even during peak of COVID-19 peak.
Union-State fiscal Coordination- It is needed for emergency provision during the pandemic to spend for health and livelihood.
States were able to reprioritise expenditure and quickly contain the Fiscal Deficit.
Reduction in Fiscal Deficit - It is due to combination of expenditure-side adjustments, improved Goods and Service Tax (GST) collection and higher tax revenues.
Non-GST revenues – It is also showing signs of recovery post pandemic in many states.

Increase in Revenue Deficit (RD) - The reduction in fiscal deficit has not resulted in corresponding reduction in revenue deficit.
The all state share of Revenue Deficit in Fiscal Deficit for 2023-24 is expected to be at 27%.
Debt to GSDP - Most States also have large debt to GSDP ratios.
This creates a fiscal imbalance which has long-run fiscal implications.

All-State Revenue Deficit - 0.78% of GSDP

All-State Fiscal Deficit - 2.9% of GSDP

Tackling the revenue deficit - Re-emergence of revenue deficit in recent years can be tackled with incentive compatible framework.
Interest-free loans - It can be given to the States by the Union Government to eliminate the possibility of a substitution of States’ own capital spending.
It also prevents the diversion of borrowed resources to finance revenue expenditure.
Fiscal adjustment plan – A defined time path with a credible fiscal adjustment plan would help restore fiscal balance and improve quality of expenditure.
A forward-looking performance incentive grants can be launched based on the different approaches provided by earlier Finance Commissions.
It is necessary to achieve the targets as prescribed in Fiscal Responsibility and Budget Management Act 2003, FRBM Act.

To know more about Union Budget 2023-24 on Fiscal Consolidation click here.

The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003.
It led to the framing of FRBM Rules in 2004 that sets targets for the Central government to ensure fiscal discipline.
Amendment - In 2018, the Centre is mandated to take appropriate steps to limit its fiscal deficit to 3% of GDP by March 31, 2021 although this is an operational target.
The mandated target pertains to the Centre’s debt-GDP ratio which is to be brought down to 40%.

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