5 July 2023 : The Hindu Editorial
The Hindu Editorial
5-July-2023
Daily Current Affairs For UPSC ,The Hindu Editorial Summary
1. A macro view of the fiscal health of States.
Topic: GS3 – Indian economy.
Context:
- The States in India play a significant role in the country’s fiscal landscape.
- Given the substantial size of the fiscal operation of States, it is essential to have an up-to-date understanding of their finances to draw evidence-based conclusions about the overall fiscal situation of the country.
Important statistics:
- States in India mobilize over one-third of the total revenue.
- They account for 60% of combined government expenditure.
- States have a share of around 40% in government borrowing.
Fiscal imbalance and consolidation:
- The general government deficit and debt incurred during the COVID-19 pandemic are receding.
- At the Union level, the fiscal deficit decreased from 9.1% of GDP in 2020-21 to 5.9% in 2023-24 (BE).
- The fiscal deficit of all States declined from 4.1% of GDP in 2020-21 to 3.24% in 2022-23 (RE) and is expected to be 2.9% of GDP for major States in 2023-24 (BE).
- Aggregated data on general government finances, including State budgets, are not readily available until the RBI’s Annual Study on State Finances is published in the second half of the fiscal year.
- Analysis based on the budgets of 17 major States, representing over 90% of combined State spending, indicates that these States have successfully contained their fiscal deficits.
- The fiscal consolidation achieved by the States is noteworthy considering the significant revenue contraction during the peak of the COVID-19 pandemic.
- States demonstrated fiscal prudence, coordinated with the Union government for emergency health and livelihood spending, reprioritized expenditure, and contained fiscal deficits.
- The reduction in fiscal deficit is attributed to expenditure-side adjustments, improved GST collection, higher tax devolution from the central government, and signs of recovery in non-GST revenues for most States.
Fiscal challenges:
- The most critical fiscal challenge for States is containing the revenue deficit.
- Despite a reduction in fiscal deficit, there hasn’t been a corresponding decrease in revenue deficit.
- Among the 17 major States, 13 have a revenue deficit in 2023-24 (BE).
- Seven States (Andhra Pradesh, Haryana, Kerala, Punjab, Rajasthan, Tamil Nadu, and West Bengal) have fiscal deficits primarily driven by revenue deficits, along with high debt to GSDP ratios.
- The specific shares of revenue deficit in fiscal deficit for these seven States range from 39.7% to 70.7%.
- The overall all-State share of revenue deficit in fiscal deficit for the same year is expected to be 27%.
- Previously, three States (Kerala, Punjab, and West Bengal) were identified as fiscally stressed, but the number has increased to seven with the rise in revenue deficit.
- The combined fiscal deficit of these States is 3.71% of GSDP, higher than the all-State average of 2.9%.
- Their combined revenue deficit is 2.15% of GSDP, compared to the all-State average of 0.78%.
- The combined debt ratio of these States exceeds the recommended debt ratio by the Finance Commission for all States in 2023-24.
- These States contribute around 40% to India’s GDP, making their fiscal stability crucial for general government macroeconomic stability.
- Fiscal stability in State finances is essential to ensure higher State-specific growth and maintain their role as drivers of public capital expenditures and investment destinations.
Framework of revenue deficit consolidation:
- Revenue deficit in State Budgets had almost disappeared before COVID-19, with states generating revenue surpluses in aggregate over the past 20 years.
- The re-emergence of revenue deficit in recent years necessitates a focus on managing it through an incentive-compatible framework.
- Interest-free loans from the Union Government to States can be linked to a reduction in revenue deficit to prevent substitution of capital spending and diversion of borrowed resources for revenue expenditure.
- A defined time path for revenue deficit reduction, coupled with a credible fiscal adjustment plan, can restore fiscal balance and improve expenditure quality.
- Forward-looking performance incentive grants can be considered to incentivize the reduction of revenue deficit, with approaches provided by earlier Finance Commissions informing the incentive structure.
- A macro view is crucial in addressing the management of revenue deficit and ensuring fiscal stability.
Model question: The fiscal health of states in India has been a cause for concern in recent years. Discuss the factors that have contributed to this issue, and the measures that can be taken to improve the fiscal health of states. (10 Marks)
Source: the Hindu, July 5, 2023, page 8
2. An incomplete reform
Topic: GS3 – Indian economy.
Context:
- The Goods and Services Tax (GST) in India has completed six years and has moved the country towards a unified market.
GST reforms:
- The initial challenges of the GST, including technical, structural, and procedural issues, have been gradually sorted out.
- Businesses with an annual turnover of ₹5 crore are now required to generate e-invoices, which has been accepted by firms without significant pushback.
- Compliance measures and the post-pandemic economic rebound have improved GST revenues, with collections crossing ₹6 lakh crore in June.
- The recent revenue buoyancy benefits states that were concerned about their fiscal capacity after the expiration of GST compensation last year.
- However, challenges remain, including the need for further simplification of the tax structure and dispute resolution mechanisms.
- The extension of GST Compensation cess levies and the unresolved issues of rate rationalization and inclusion of excluded items limit the efficiency gains of the GST.
- The GST Council should meet more frequently and address these issues promptly to enhance the effectiveness and simplicity of the GST.
Model question: The Goods and Services Tax (GST) has been in operation for over six years now. Discuss the need for reforms in the GST regime, and suggest some possible reforms that can be implemented. (10 Marks).
Source: the Hindu, July 5, 2023, page 8
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