ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Should States Target a 3% Fiscal Deficit?

India’s current fiscal rules target a 3% fiscal deficit for the central and state governments. Though states have largely adhered to their borrowing ceilings, subnational debt is proliferating. A significant reduction in subnational borrowing is required to stabilise the states’ debt around the desired level of 20% of gross domestic product. Symmetry should not be forced on central and state borrowing flows, given their widely divergent levels of debt stocks.

This article is a revised version of a study prepared for the Committee to Review the Fiscal Responsibility and Budget Management Act (2003), Ministry of Finance, Government of India in 2017. The authors thank Sumit Bose, Vijay Singh Chauhan, Sajjid Chinnoy, Pinaki Chakraborty, Sahana Roy Chowdhury, N M Jha, Prachi Mishra, N K Singh, Pramod Sinha, Arvind Subramanian, Suranjali Tandon, and Shruti Tripathi for valuable discussions and Diwan Chand for help with data collection. They also thank Meghna Paul, Sakshi Jain, Nikita Kakkar, and Anshuman Reddy for research assistance.

Active thinking regarding statutory controls on government borrowing in India began in 2000 when the then finance secretary, E A S Sarma, chaired a 10-member committee to study various aspects of the centres fiscal architecture. They prepared a draft fiscal responsibility legislation (FRL) for the central government called the Fiscal Responsibility and Budget Management (FRBM) Bill, a diluted version of which was passed by Parliament in 2003.1 A similar exercise followed at the level of the states with technical assistance and direction from a Reserve Bank of India (RBI) working group that drafted a model FRL for the states (RBI 2005) and the Twelfth Finance Commission (TFC).

Both these bodies recommended a state FRL similar to the centres FRBM Act. States were quick to adopt fiscal rules after the TFC stipulated that the enactment of FRL was a precondition for availing its debt restructuring scheme, the Debt Consolidation and Restructuring Facility (DCRF). By 200607, FRL were in force in as many as 20 states, bringing a rule-based framework at the centre of national and subnational fiscal policy in India.

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Published On : 20th Jan, 2024

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