State governments may undo a decade’s gains in fiscal consolidation


The spectre of inflation has always animated political debate in India. Therefore, it is no surprise that political parties have been able to put aside differences and work on formalising institutional arrangements to deal with this economic challenge. If mandating RBI with a formal goal of targeting inflation was a landmark, reviving the debate on the related issue of fiscal profligacy is no less important. In this context, the need of the hour is to focus on fiscal challenges at the level of states no less than that of the Centre.

The Constitution has entrusted states with much development work but offered limited avenues to raise revenue. Consequently, they are prone to borrowing bouts which lead to a crippling debt burden. At present, states have once again begun to veer towards fiscal profligacy. For instance, RBI pointed out that states breached the prudent 3% mark of fiscal deficit to GDP ratio in 2015-16 for the first time in more than a decade. Even if it was partially caused by special borrowing to deal with a struggling power sector, the fallout in terms of repayment obligations will squeeze future budgets.

This makes it necessary to take a holistic view of India’s fiscal position. Fiscal consolidation only at the Centre is inadequate when states are in danger of undoing years of gains through measures such as Uttar Pradesh’s farm loan waiver. In this context, it is important that there be an informed debate on the recent report of FRBM review committee. India needs a more robust institutional architecture to prevent periodic bouts of loose fiscal policies and ballooning deficits at both Centre and states. It is the only way to ensure macroeconomic stability, an essential pre-requisite for durable economic growth.

This piece appeared as an editorial opinion in the print edition of The Times of India.

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