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

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Utilisation of Government Borrowings in Major Indian States

Fiscal sustainability is a key element for subnational governments in India as fiscal policy is the only instrument that can be used to correct economic malady. As far as state government finances are concerned, subnational financial stability can be understood as the capacity to generate adequate resources to afford their expenses on a sustained basis. An analysis of subnational fiscal sustainability, through a study of utilisation patterns of total debt receipts of state governments, is undertaken for 17 major Indian states during 1980–81 to 2014–15. The results indicate wide fluctuations among the states. While Kerala, Punjab, and West Bengal have shown poor and unproductive utilisation of debt receipts, Punjab has witnessed maximum instability.

Fiscal Space and Union Budget 2020–21

This article points out some drawbacks in the criticism of the Union Budget 2020–21. It notes that the critique suffers from some limitations, ranging from oversimplified solutions, analytical deficiencies and outright factual errors.

The Indian Economy

Deadly and frightening as it appears, it is still too early to estimate the severity of India’s Covid-19 second wave. Unlike the transatlantic countries where it appears to have peaked, India’s second wave is still trending upwards. While the second wave is more devastating, India’s unpreparedness is evident. India needs to recognise that such pandemics will come again. It needs to diversify and secure its supply chains, vaccine output, and upgrade its poor healthcare infrastructure. The Indian economy has been badly hit by the pandemic, with one of the highest output losses amongst major economies. One of the possible reasons for this is the limited fiscal support despite a stringent lockdown, with most of the heavy lifting done through monetary measures. Going forward, its economy needs to overcome several challenges before it can return to its former high growth trajectory.

Falling behind the Curve Is Not an Option

India must jettison orthodox economics amidst the pandemic to protect employment and sustain a recovery.

Garnering the Fiscal Stimulus

The share of resources distributed in the stimulus package to the farmers and labourers is very less as compared to other stakeholders of the economy. As public policy is influenced by bargaining power through intense lobbying, low distribution of resources towards farmers and labourers could be due to their low bargaining power. Collective action is required to bargain or lobby for resources. The farmers are adversely placed with regard to collective action because the transaction cost of organising collective action is higher but their ability to bear the cost is lower. The industry is placed in a much better position on both these counts. The inability of farmers to provide critical minimum resources for collective action may further weaken their bargaining position.

Economics, Prudence, and a Pandemic

Clinging on to orthodox fiscal prudence is not the best practice in the time of a pandemic.

Incongruence between Announcements and Allocations

A scrutiny of the Indian economy and the state of public finances reveals that while there are a few areas of improvement under the current government, the economy remains fragile and, worryingly, the situation has worsened in some other respects. It was hoped that the Union Budget 2018–19 would take measures to address some of these concerns but these expectations have been belied. Budget 2018–19, possibly with an eye on elections, has made grand announcements instead of taking hard decisions and making adequate allocations towards key sectors of the economy.

Once More on the ‘Humbug of Finance’

While an expansionary monetary policy acts by respecting private rationality, an expansionary fiscal policy, involving larger government expenditure financed by a fiscal deficit or taxes on capitalists, implicitly highlights the limitations of private rationality. Finance capital not surprisingly opposes the latter, even though the proffered arguments for “fiscal responsibility” have no theoretical validity. Given the current world economic crisis, a spate of beggar-my-neighbour policies are on the horizon.

Erroneous Understanding of Macroeconomic Challenges

The government chose not to adequately expand budgetary expenditure to stimulate aggregate demand due to an erroneous understanding of India’s macroeconomic challenges. It relies heavily on imagined fiscal gains from demonetisation and the introduction of the Goods and Services Tax regime. The Union Budget 2017–18 was a missed opportunity for the government and our economy.

Emerging Issues in Union–State Fiscal Relations

The restructuring of non-Finance Commission Grants is an improvement when it comes to scheme-related transfers. However, when 10 schemes constitute 90% of core grants, there is further scope for rationalisation of these schemes. The implications of following a sustainable debt path under the new Fiscal Responsibility and Budget Management framework in the budget indicate a larger fi scal correction at the state level vis-à-vis the union government.

What Does the Rural Economy Need?

The agricultural sector has performed worse than the other sectors over the years. The shares of non-agricultural employment and output have increased, while70% of agricultural householdscannot meet their low consumptionneeds even after diversification of sources of income. An analysis of budgetary provisions for the rural economy suggests that the government has not done enough to address some of these well-documented problems, and does not have the required vision to substantially increase rural employment opportunities.

An Examination of Revenue Generation

The revenue side of the budget is scrutinised to understand if the government is being realistic about revenue generation in 2017–18. Clearly, there is over-optimism, given that economic growth will be slow. Too much is expected from voluntary disclosure and penalties, while incentives are not in place. It would make sense to allow some slippage in the deficit targets in order to revive the economy. In addition, the increasing problem of cesses is discussed with reference to the Krishi Kalyan Cess to assess whether cesses serve the purpose for which they are introduced.


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