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Financial instability UPSC NOTE


  • Public debt management (PDM) is the process of designing and implementing a strategy for managing the government’s debt in order to raise the required amount of funding, achieve its risk and cost objectives, and meet any other debt management goals.

  • Some of the primary concerns associated with PDM in India are:

    • High Debt-to-GDP Ratio

    • Rising Interest Payments

    • Debt Sustainability Challenges

    • Lack of a Public Debt Management Agency

  • Some of the possible measures to address the concerns of public debt management in India are:

    • Fiscal Consolidation

    • Revenue Mobilization

    • Expenditure Efficiency

    • Asset Monetisation and Privatisation

    • Public Debt Management Agency

  • The Fifteenth Finance Commission has designed the tax transfer formula based on population (15%), area (15%), income distance (45%), demographic transition (12.5%), forest and ecology (10%) and tax effort (2.5%). 

  • The weightage given to the distance of per capita income in the Finance Commission tax transfer formula adversely affects growing States, including Kerala. 

  • This leads to the debate on equity versus efficiency principles of intergovernmental fiscal transfers. If economic convergence (poor States catching up with the rich States) is a prime concern of Union Finance Commissions, giving weightage to the distance criterion is valued.

  • Kerala, had filed a suit in the Supreme Court of India against the Centre’s decision on the net borrowing ceiling of States

  • Over the years, the share of Union Finance Commission tax transfers has declined for a few States, including Kerala. 

  • The inter se State share of Kerala in the Finance Commission transfers (which was 2.341% in the Thirteenth Finance Commission, and which increased to 2.5% in the Fourteenth Finance Commission) declined to 1.925% in the Fifteenth Finance Commission.

  • In the post-COVID-19 pandemic fiscal strategy, the fiscal deficit to GDP is envisaged as 3.5% for States, with 0.5% tied to power sector reforms and the general government public debt to GDP at 60% and central government debt at 40%.

  • The outstanding liabilities of Kerala are 36.9 percentage of GSDP as per 2024-25 (BE). However, the roll-over risk is not there as around 16% debt of Kerala has a maturity period within 2025. 

Way Forward

  • Investing in a green resilient and knowledge-based economy is crucial for sustainable economic development of the State

  • Judicious bargaining with the Finance Commission relating to magnitude and criteria (with weightage decisions) is key to ensuring the progressivity of fiscal transfers to the State.

  • There needs to be a negotiation with the Sixteenth Finance Commission for specific-purpose transfers to tackle State-specific issues such as demographic transition, inward and outward migration and climate change crisis.



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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Financial instability UPSC NOTE
Financial instability UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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