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Fiscal Situation of States UPSC NOTE


Fiscal Situation of States
  • In India, the States mobilise altogether more than a third of total revenue, spend 60% of combined government expenditure, and have a share in government borrowing that is around 40%.

  • There have been significant post-pandemic fiscal corrections at the Union and State levels. 

  • At the Union level, the fiscal deficit declined from 9.1% of GDP in 2020-21 to 5.9% in 2023-24 (BE). 

  • All State fiscal deficit was 4.1% of GDP in 2020-21. It declined to 3.24% of GDP in 2022-23 (RE). 

  • For the major States, for the year 2023-24 (BE), fiscal deficit is expected to be 2.9% of GDP.

  • According to the data collated from the individual Budgets of 17 major States.

  • The analysis shows that these States together have managed to contain their fiscal deficits.

  • States in aggregate managed to be fiscally prudent despite a significant contraction in revenues even during the peak of COVID-19.

  • Emergency provision for health spending and livelihood during the COVID-19 was not easy and required Union-State fiscal coordination.

  • States were able to reprioritise expenditure and quickly contain the fiscal deficit.

  • The reduction in fiscal deficit is a combination of expenditure-side adjustments, improved GST collection and higher tax devolution due to buoyant central revenues.

  • Non-GST revenues are also showing signs of recovery after the pandemic in most States.

  • The reduction in fiscal deficit has not been accompanied by a corresponding reduction in revenue deficit.

  • As in 2023-24 (BE), out of 17 major States, 13 States have deficit in the revenue account. 

  • Out of 13 States, fiscal deficits in seven States are primarily driven by revenue deficits; 

    • The States being Andhra Pradesh, Haryana, Kerala, Punjab, Rajasthan, Tamil Nadu, and West Bengal. 

  • They also have large debt to GSDP ratios.

  • 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).

  • To ensure higher State-specific growth, the fiscal stability of State finances is critical. 

  • Some of these States have also been big drivers of public capital expenditures and favoured investment destinations of private investors.

Framework of revenue deficit consolidation

  • Focus back on the management of revenue deficit by creating an incentive compatible framework. 

  • The following measures can be considered.

  • interest-free loans to the States by the Union Government, if continued, may be linked to a reduction in revenue deficit.



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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Fiscal Situation of States UPSC NOTE
Fiscal Situation of States UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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