Indian Express Editorial Analysis

12-April-2024

1. Decoding state budgets

Topic: GS3 – Indian Economy – Government Budgeting

This topic is relevant for both Prelims and Mains as the article covers various aspects of government budgeting.

Context:

The ongoing election season in India has brought a sharp focus on the fiscal health of the country.
While the central government’s fiscal metrics are closely scrutinized and well understood, the fiscal situation of state governments tends to receive less attention.
However, recent increases in market borrowings by state governments and key policy changes have reignited interest among market participants regarding the fiscal health of states.

Analyzing State Budgets: Rich Sources of Information:

State budgets serve as rich sources of publicly available information on state government finances.
However, analyzing these budgets presents both interest and challenges due to a web of factors among states.
Additionally, the publication of monthly fiscal indicators by the Comptroller and Auditor General (CAG), though with modest lags, aids in assessing emerging trends in state finances.
Other sources of information include data on states’ usage of ways and means advances, overdraft facilities, and market borrowings facilitated by the Reserve Bank of India (RBI).

Analysis of 2024-25 Budgets and Revenue Projections:

The 2024-25 budgets or votes on account (VoA) are available for 26 states, except Arunachal Pradesh and Sikkim.
Analysis of these budgets reveals that states expect a 2% growth in combined revenue receipts this year.
However, this growth is contingent upon various factors, including the accuracy of base revenues indicated in the revised estimates for the previous fiscal year.

Importance of Own Tax Revenues and Transfers from Centre:

Around half of the total revenues of states come from states’ own tax revenues (SOTR).
Any deviation between actual and indicated growth of own taxes can significantly impact the overall revenue expansion.
Similarly, transfers from the Centre, including taxes and grants, account for another 40-45% of state revenues.
Tax devolution from the Centre is projected to increase by 10.4% this year, based on the interim Union budget presented in February 2024.

Expenditure Side: Growth in Revenue and Capital Expenditures:

On the expenditure side, states have planned for a 7% growth in revenue expenditure and an 11% growth in capital expenditure.
However, there are concerns regarding the accuracy of these estimates, especially regarding capital spending.

State Borrowing Trends and Fiscal Deficit:

State borrowing trends are crucial indicators of fiscal health.
Despite steady fiscal deficit projections, actual debt issuance during March 2024 surpassed expectations, indicating potentially higher borrowing needs.
Factors such as the preference to hold more cash and the utilization of borrowing limits before the fiscal year ended may have contributed to this trend.
However, initial auctions in the current fiscal year have seen lower borrowing amounts compared to indications.

Projection for Gross Borrowing and Borrowing Costs:

Gross borrowing by states is expected to increase to Rs 10.5-11 trillion in the current year.
Anticipated Foreign Portfolio Investor (FPI) funds related to bond index inclusion may ease supply-demand dynamics in the government bond market.
Additionally, modest rate cuts expected from the Monetary Policy Committee in the second half of the year could lower states’ borrowing costs.

Conclusion: Anticipated Trends and Factors Influencing Fiscal Health:

Ongoing elections in India have heightened attention on the fiscal health of both the central and state governments.
While state budgets provide valuable insights, there are challenges in accurately assessing revenue and expenditure projections.
State borrowing trends, influenced by various factors, including political events and economic conditions, are crucial indicators of fiscal health.
As the year progresses, monitoring borrowing patterns and their impact on fiscal deficit and borrowing costs will be essential for understanding the overall fiscal health of Indian states.

Key Facts about the Union Budget of India

From the budget year 2017-18 and onwards, the Union Budget is presented by the Union Finance Minister on February 1 of every year.
Prior to the budget year 2017-18, the Budget was presented in the last week of February as per the colonial practice.
The Railway Budget was merged with the General Budget from the fiscal year 2017-18 based on the recommendation of the Bibek Debroy Committee.
The Railway Budget was separated from the General Budget by the British in 1924 on the recommendations of the Acworth Committee.
The nodal agency for the preparation of the Union Budget is the Budget Division of the Department of Economic Affairs (Ministry of Finance).
Process of Government Budgeting in India
The process of government budgeting in India comprises four distinct phases:
Budget Formulation: It involves preparation of estimates of expenditure and receipts for the ensuing financial year.
Budget Enactment: It involves approval of the proposed Budget by the Legislature through the enactment of Finance Bill and Appropriation Bill
Budget Execution: It involves enforcement of the provisions in the Finance Act and Appropriation Act by the government. Roughly, it comprises of collection of receipts and making disbursements for various services as approved by the legislature.
Legislative Review: It refers to audits of government’s financial operations on behalf of the legislature

PYQ: Consider the following statements: (2018)

1) The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.

2) The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments.

3) As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 and 3 only

(d) 1, 2 and 3

Ans: (c)

Practice Question: Explain the importance of understanding the fiscal health of state governments in India. Discuss the key factors that influence state government finances and how they impact economic governance at the state level. Provide examples to support your arguments. (250 words/15 m)

2. A maritime bastion

Topic: GS3 – Internal Security –

This topic is relevant for both Prelims and Mains as the article highlights the security concerns associated with the Andaman and Nicobar Islands, given their strategic location and historical significance.

Context:

The aftermath of the 1857 War of Independence witnessed the establishment of a penal colony in the Andaman and Nicobar Islands by the British.
The islands, known as Kalapani, became a place of incarceration for Indian revolutionaries and freedom fighters.
However, due to their remote location and dark symbolism, they experienced years of benign neglect from the distant seat of power in New Delhi.

Security Concerns and Strategic Importance:

The security focus on the Andaman and Nicobar Islands gained prominence in 1962 when the Indian Navy raised alarms about a reported sighting of a Chinese submarine.
This prompted the government to sanction a naval garrison to guard the archipelago, which spans 836 islands spread across 450 miles of sea.
Recent reports highlight the heightened security measures, crucial for preventing any potential slip of control over these strategically significant islands.

Historical Significance and Strategic Vulnerabilities:

The islands have a complex history, marked by occupation during World War II and subsequent liberation by Netaji Subhas Chandra Bose’s Indian National Army (INA).
However, they reverted to British control after the war’s end. The British had initially recommended retaining the islands due to their strategic location, but they ultimately relinquished them to India on the eve of Independence.

Security Infrastructure and Strategic Challenges:

Over the years, the Andaman and Nicobar Islands have seen the establishment of the Andaman Nicobar Command (ANC) and upgrades to Fortress Andaman & Nicobar.
However, the military’s quest for “theaterization” has not been successful, despite the ANC’s proven success as a joint operational command.
The unique geography of the islands presents both opportunities and challenges, with concerns about potential intrusions and the need for robust maritime domain awareness and defensive capabilities.

Strategic Imperatives and Future Prospects:

The islands hold immense strategic significance, given their location near crucial maritime chokepoints like the Malacca Strait.
India’s ability to project power and maintain peace in the Indo-Pacific region hinges on leveraging the strategic advantages offered by the Andaman and Nicobar Islands.
A cohesive strategy aimed at bolstering security infrastructure and enhancing cooperation with like-minded partners is essential for transforming the islands into a formidable maritime bastion and regional hub for cooperative maritime endeavors.

Conclusion:

The reported security infrastructure upgrades underscore the imperative of developing a cohesive strategy for the Andaman and Nicobar Islands.
Such a strategy should not only extend India’s defensive perimeter but also enable the projection of power and cooperation with regional partners to maintain peace and security in the Indo-Pacific region.

What are the Challenges Related to Andaman and Nicobar Islands?

Illegal Migration and Smuggling: Andaman and Nicobar Islands face greater challenges to their internal security through non-conventional threats such as illegal migration from littoral states of the Bay of Bengal, poaching of marine and forest resources, arms and narcotics smuggling through uninhabited islands and natural disasters.
Unsustainable Development: Andaman and Nicobar have become a major tourist attraction, and this has resulted in many development projects being initiated in this region. While at one side it will transform the islands substantially, it would also cause loss of ecological stability.
Developmental activities are also impacting the coral reefs in the area, which are already under threat from warming oceans, and are of enormous ecological importance. Environmentalists have also flagged the loss of mangroves on the island as a result of the development project.
Geological Volatility: The Andaman and Nicobar island’s groups lie in a seismically highly active zone. Due to this, the region is prone to a number of natural disasters.For instance, in 2004 an earthquake and accompanying tsunami devastated large parts of the island chain.Nicobar and Car Nicobar (northernmost Nicobar Island) lost almost one-fifth of its population and close to 90% of its mangroves.
Geo-Political Instability: Andaman and Nicobar islands are part of the Indo-Pacific geopolitical theatre, where China is actively trying to expand its influence, potentially posing a threat to India’s blue economy and maritime security. The aspirations of China to register its presence in this region can be seen in Hambantota, Sri Lanka where China is in possession of Sri Lankan real estate.
Encroachment in Tribal Space: While Particularly Vulnerable Tribal Groups (PVTGs) are accorded the highest level of protection by local administration, they still face numerous challenges due to encroachment into their areas in the name of development, and lack of effective rehabilitation program.

PYQ: In which one of the following places is the Shompen tribe found? (2009)

(a) Nilgiri Hills

(b) Nicobar Islands

(d) Lakshadweep Islands

Ans: (b)

Practice Question: Discuss the strategic significance of the Andaman and Nicobar Islands in India’s maritime security framework. Assess India’s efforts to bolster its defense infrastructure and enhance regional cooperation to safeguard its maritime interests in the Indo-Pacific region, with specific reference to the Andaman and Nicobar Islands. (250 words/15 m)