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Q. Issue of fiscal discipline among states: Discuss issues related to financial discipline of state governments.
Jan 16, 2017 Related to : GS Paper-3

Ans :

 Introduction-

Recently Reserve Bank Governor Urjit Patel has rightly cautioned both central and state governments that combined high borrowings of both might block India’s ability to improve its credit rating. According to official data, the combined debt to GDP ratio is about 66% in 2014-15. In last year, the rating agency Moody has forecasted combined fiscal deficit of the Centre and states at 7.2% in 2015-16. Hence it’s not only centre, but states also need to focus on their fiscal discipline.

Issues of fiscal discipline among states-

  • 14th finance commission has recommended to both centre and states to limit their combined fiscal deficit to 6% for the period 2015-16 to 2019-20.
  • But India Ratings and Research (Ind-Ra) report on the budget performance of 23 states has estimated that budgetary targets are likely to be missed in financial year 2017 and only 12 states had a revenue surplus in financial year 2016 and qualify for additional borrowings.
  • Though states have their own resources (ex. VAT) and also receive 42% of tax devolution, but at an aggregate level, states are likely to have had a revenue deficit for a third consecutive year in financial year 2016.

What can be done-?
  • There an urgent need to adopt various fiscal discipline measures like lowering the debt to GDP ratio, zero-revenue deficit and emergence of revenue surplus a suggested by 14th commission. 
  • Similarly, the Goods and Services Tax must be adopted at the earliest to boost revenues. Better governance and infrastructures should be developed to attract investments. 

Conclusion-


To raise the resources by their own states need to raise their credit rating, for it requires adopt greater fiscal discipline. Most of the states are not strictly following the fiscal discipline measures suggested by finance commission and it will affect their credit rating. Hence along with centre states also need to follow greater fiscal discipline.


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