India’s economic juggernaut, powered by its diverse states, needs a crucial balancing act. While recent fiscal consolidation efforts have brought stability to state economies, the tightrope walk between fiscal prudence and development aspirations remains precarious. This balancing act is complicated by the rising aspirations of citizens for improved public services and social welfare schemes.
States need to find creative ways to finance these demands without sacrificing fiscal sustainability. One promising avenue is leveraging technology to improve service delivery and reduce administrative costs. Additionally, exploring social impact bonds can attract private capital for social sector projects, generating both social and financial returns.
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State economies cut deficits
The combined gross fiscal deficit-to-GDP ratio of states has shrunk significantly, from 4.1% in 2020-21 to 2.8% in 2021-22, says an RBI report titled State finances: A study of budgets. This decline reflects a concerted effort to curb expenditure and bolster revenue generation. The sharp decrease in revenue deficits across state economies paints a promising picture. States are managing resources better and relying less on grants from the Centre, indicating a nascent fiscal autonomy.
However, this progress remains uneven. While some states like Tamil Nadu have successfully reduced their revenue deficits through efficient tax administration and targeted spending, others like Rajasthan and Punjab struggle with high deficits due to factors like populist policies and dependence on volatile commodity taxes. Addressing these disparities within states is crucial for ensuring national fiscal stability.
There has been concerns over the fiscal health of some states, where budget deficits have exceeded 4% of their gross state domestic product, significantly higher than the national average of 3.1%. These states also face the issue of high debt levels, with figures surpassing 35% of GSDP, in contrast to the national average of 27.6%. The debt levels of Arunachal Pradesh, Bihar, Goa, Himachal Pradesh, Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Punjab, Rajasthan, and West Bengal are expected to cross 35% of the GSDP this financial year.
This situation is further exacerbated by the potential risks associated with additional allocations for non-merit goods, subsidies, and transfers. The plan of some states to revert to the old pension scheme from the National Pension System poses a substantial fiscal risk. Such a shift could dramatically increase the fiscal burden, with estimates suggesting a potential increase to 4.5 times that of the NPS, adding an additional 0.9% burden to the GDP annually by 2060.
Challenges and concerns
Own tax revenue, the bedrock of fiscal autonomy, remains stagnant at around 6-7% of GSDP. This dependence on volatile indirect taxes and central grants makes state economies vulnerable to downturns and weakens their bargaining power. Despite consolidation efforts, the debt levels of state economies remain alarmingly high, exceeding 27% of GDP. This shackling debt constrains essential investments in infrastructure and social sectors, hindering long-term growth prospects.
Furthermore, the high debt burden disproportionately impacts infrastructure development in states with lower per capita incomes and weaker resource bases. This hinders their ability to attract private investment and perpetuates a cycle of underdevelopment. Innovative debt management strategies, such as securitizing infrastructure assets and exploring green bonds, can be explored to alleviate this burden.
The financial health of state economies paints a starkly uneven picture. Resource-rich and industrially developed states like Maharashtra and Tamil Nadu fare significantly better than their agrarian counterparts like Bihar and Odisha. This disparity exacerbates regional inequalities and hampers national progress.
Strengthening the fiscal fabric
Broadening the tax base, improving tax administration, and rationalizing tax rates can unlock the potential of own revenue generation. States can explore progressive measures like wealth taxes and carbon taxes to tap into new sources of income. User charges for public services, efficient property tax collection, and harnessing the potential of natural resource rentals can diversify revenue streams and reduce dependence on grants.
A Catalyst for Shared Growth: Public-private partnerships (PPPs) can attract private capital for critical infrastructure development, fostering economic activity, creating jobs, and generating long-term returns for both parties.
A Hand Up, Not a Handout: Collaborative federalism, ensuring timely devolution of funds and addressing vertical fiscal imbalances, is crucial for sustainable state economies. Open dialogue and a spirit of cooperation between the Centre and states can pave the way for equitable resource allocation and shared responsibility for development.
Walking the tightrope with confidence
This balancing act is further complicated by the rising aspirations of citizens for improved public services and social welfare schemes. States need to find creative ways to finance these demands without sacrificing fiscal sustainability. One promising avenue is leveraging technology to improve service delivery and reduce administrative costs. Additionally, exploring social impact bonds can attract private capital for social sector projects, generating both social and financial returns.
Ultimately, the success of Indian states in navigating this precarious fiscal tightrope depends not just on policy decisions but also on active citizen engagement. Demanding transparency and accountability from elected officials, advocating for responsible resource management, and promoting fiscal literacy can empower citizens to become partners in building a fiscally robust and prosperous India. By embracing a collaborative approach that prioritizes both prudence and progress, Indian states can truly walk the fiscal tightrope with confidence and unlock their full potential for inclusive and sustainable growth.
Indian states stand at a crossroads. The path to fiscal consolidation, while necessary, must be navigated with a clear vision for inclusive and sustainable development. By diversifying revenue sources, fostering fiscal federalism, and embracing innovative financing mechanisms, states can not only strengthen their financial footing but also fuel the engine of India’s economic growth. This journey requires not just fiscal prudence, but also a commitment to social justice, regional equity, and long-term prosperity for all.
At Union government has also been maintaining a focus on fiscal prudence while ensuring adequate funding for welfare activities. The government has managed supplementary budgets with significant allocations towards vital sectors like fertilizers, food subsidies, defense, and employment guarantee schemes. Balancing the interests of farmers and consumers, particularly in situations of price volatility and market accessibility, has been a key aspect of this strategy.