Model Answer
0 min readIntroduction
Fiscal policy in India is a complex interplay between the Centre and the States, governed by constitutional provisions and finance commission recommendations. Fiscal prudence generally refers to maintaining a sustainable debt level, controlling deficits, and prioritizing expenditure efficiency. Conversely, fiscal profligacy implies excessive borrowing, rising deficits, and potentially wasteful spending. The period since the 2008 global financial crisis has witnessed significant shifts in India’s fiscal landscape. While states, generally, have adhered to fiscal consolidation targets, the central government’s fiscal position has often been characterized by deviations, particularly in recent years, leading to the assertion that the last fifteen years have been marked by state-level prudence and central-level profligacy. This answer will critically examine this claim.
Fiscal Performance of States: A Story of Prudence
Generally, states in India have demonstrated greater fiscal discipline compared to the Centre. This is largely due to constitutional constraints, particularly Article 293, which requires states to maintain a balanced budget in the long run. Several factors contribute to this:
- Fiscal Responsibility Legislation (FRL): Many states adopted their own FRLs, often mirroring the central FRL Act of 2003, promoting fiscal consolidation.
- Reliance on Transfers from the Centre: States heavily rely on tax devolution and grants from the Centre, incentivizing them to maintain fiscal stability to ensure continued access to these funds.
- Limited Revenue Sources: States have limited independent revenue-raising powers (primarily relying on taxes like GST, stamp duty, and land revenue), forcing them to prioritize expenditure.
Data from the Reserve Bank of India (RBI) shows that the combined fiscal deficit of states as a percentage of GDP has generally remained within the targets set by the Finance Commissions. While there were instances of exceeding targets, particularly during the COVID-19 pandemic (FY21 & FY22), states largely adhered to fiscal consolidation norms. For example, the 15th Finance Commission recommended a fiscal deficit of 3% of GSDP for states, and most states strived to remain close to this target.
Fiscal Performance of the Centre: A Trajectory of Profligacy
The central government’s fiscal performance, however, presents a different picture. While the Centre initially demonstrated fiscal prudence in the early 2000s with the FRBM Act, 2003, subsequent years have witnessed frequent deviations from fiscal targets.
- Increased Expenditure on Subsidies: Significant increases in expenditure on subsidies, particularly food, fertilizer, and fuel, have strained the central government’s finances.
- Tax Cuts & Revenue Shortfalls: Tax cuts aimed at stimulating economic growth, coupled with revenue shortfalls due to economic slowdowns (e.g., 2008 financial crisis, COVID-19 pandemic), have contributed to rising deficits.
- Off-Budget Borrowing: The Centre has increasingly resorted to off-budget borrowing through Public Sector Undertakings (PSUs) and special purpose vehicles (SPVs) to finance expenditure, effectively circumventing fiscal deficit limits. This practice was highlighted by the Comptroller and Auditor General (CAG) in several reports.
- COVID-19 Pandemic & Subsequent Stimulus: The COVID-19 pandemic necessitated substantial fiscal stimulus packages, leading to a significant increase in the fiscal deficit. While unavoidable, this further exacerbated the trend of central fiscal profligacy.
The central government’s fiscal deficit widened significantly in FY20 and FY21, reaching 9.2% and 6.9% of GDP respectively. While the government aims to reduce the fiscal deficit to below 4.5% of GDP by FY26, achieving this target remains challenging. The implementation of schemes like PM-KISAN and increased spending on infrastructure projects, while beneficial, add to the fiscal burden.
Comparing State and Central Fiscal Indicators (2013-2023)
| Indicator | States (Average) | Centre (Average) |
|---|---|---|
| Fiscal Deficit (% of GDP/GSDP) | 2.8% | 6.2% |
| Debt-to-GDP Ratio | 25% | 58% |
| Revenue Expenditure Growth (Average Annual) | 8% | 12% |
(Data based on RBI reports and budget documents, knowledge cutoff 2023. Averages are approximate)
Nuances and Counterarguments
While the general trend supports the assertion, it’s crucial to acknowledge nuances. Some states have exhibited fiscal profligacy, particularly those offering populist schemes without adequate revenue generation. Furthermore, the Centre’s increased expenditure has often been directed towards nation-building activities like infrastructure development and social welfare programs, which have long-term economic benefits. However, the reliance on off-budget borrowing and frequent deviations from fiscal targets raise concerns about transparency and sustainability.
Conclusion
In conclusion, the claim that the last fifteen years have been characterized by fiscal prudence on the part of states and fiscal profligacy by the Centre holds considerable merit. States, constrained by constitutional provisions and reliant on central transfers, have generally maintained fiscal discipline. The Centre, however, has frequently deviated from fiscal targets, driven by increased expenditure, revenue shortfalls, and the use of off-budget financing. While central expenditure has supported economic development, the long-term sustainability of this approach remains questionable. A renewed commitment to fiscal consolidation, transparency in budgeting, and a more balanced approach to expenditure are crucial for ensuring macroeconomic stability.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.