Government finance: union and states, Microeconomics


The fiscal position of the Governments - both Centre and States - has been under stress since the mid-1980s. The stress stems from the inadequacy of receipts in meeting the growing expenditure requirements. Reflecting the fiscal stress, the expenditure for developmental activities, which are directly related to growth, has suffered. On the other hand, expenditure on non-developmental purposes, largely committed, has witnessed a steady rise. The crucial issue, therefore, is to bring about improvement in the finances with a view to restructuring the expenditure in favour of developmental expenditure in order to enable higher growth.

That the state of finances of the States is in disarray is beyond dispute. The State finances have not been properly managed not only by the States but also by the Planning Commission and the Central Government, which include economists who do not see States as autonomous, responsible organisations which have to take care of the debt by themselves. Today, one of the major obstacles in the way of reviving growth is the sorry state of State finances since they could not do the minimum that they should do. They have no money to invest. Apart from the persistent problem of unacceptable revenue deficits and high fiscal deficits, many State governments are now faced with the problem of mounting debt, particularly the burden of contingent liabilities in the form of outstanding guarantees.    

"Mandating fiscal responsibility for the Government through the statute is an idea which is yet to receive active political endorsement in India. But the fiscal environment for the Central and State governments has already become perilously grave. The subject cannot brook any further delay. Fiscal sickness is a grave problem in India. Many State governments are already technically bankrupt while many others are just short of being terminally ill. The Union Government finances are under great strain; interest on public debt eats away half of revenue receipts and even current consumption expenditure is financed by borrowing. Both the Central and State governments continue to spend recklessly and do not take any serious steps to mobilise resources and streamline revenue collections. Fiscal indiscipline is rampant." The total debt of the Central and State governments is currently estimated at above 80 per cent of GDP. Recent years have seen a very sharp upsurge in the indebtedness of the centre as well as the states.  Ultimately, budgets are an exercise in political brinkmanship, balancing considerations of fiscal prudence with political strategy. The whole issue of over-emphasis on fiscal compression as a matter of public policy needs to be visited, especially in the current context of India facing a high fiscal deficit. Much as one may bemoan it, it is only crises that bestirs us into action. 

Posted Date: 11/15/2012 1:51:23 AM | Location : United States

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