The fiscal tightrope for State government
Prelims:
Indian Economy, Polity & Governance
Mains:
GS Paper II-Polity & Governance, GS Paper III-Indian Economy
Current relevance:
The White Papers on State Finances
released by the Kerala and Tamil Nadu Governments have highlighted
the growing debt burden and fiscal stress faced by State governments, reviving
the debate on fiscal federalism, State borrowing, and development financing.
At a glance:
Fiscal
Constraints:
1.
States face persistent fiscal deficits as
government expenditure continues to exceed revenue receipts.
2.
Limited fiscal autonomy and a relatively
lower share in Central tax devolution make States increasingly
dependent on financial transfers from the Union Government.
3.
A significant portion of State budgets is spent on
salaries, pensions, and other revenue expenditure, leaving limited resources
for capital investment.
4.
Lower capital expenditure restricts
investment in infrastructure and long-term economic growth.
5.
Higher borrowing costs through State
Development Loans (SDLs) increase the overall debt burden on State
governments.
Measures to Strengthen State
Finances:
1.
Strengthen fiscal federalism by enhancing the
fiscal autonomy of States.
2.
Ensure equitable tax devolution and timely fiscal
transfers from the Union Government to strengthen the financial capacity of
States.
3.
Reduce borrowing costs for State
governments to improve fiscal sustainability.
4.
Increase investment in infrastructure, higher
education, research and innovation, public transport, and knowledge-based
industries for long term growth.
5.
Improve public financial management and
strengthen revenue mobilisation to support sustainable and inclusive
development.
Revenue Expenditure: Short-term expenses incurred during
day-to-day operations to maintain the business or governmental body.
Capital Expenditure (CapEx): Funds a company
or government uses to acquire, upgrade, or maintain long-term physical assets,
such as property, buildings, or equipment.
State Development Loans (SDLs): Marketable debt
securities (bonds) issued by individual state governments in India to fund
fiscal deficits and finance infrastructure or public welfare programs.