The Central govt has instructed the banks to stop lending to state government entities based on the escrow of the state’s future revenue streams . Escrowing means using state assets in the safe custody of a financial institution to secure loans against them. The recent instruction given by the centre and RBI would badly affect both the committed as well as capital expenditure of the states. The Centre’s action is nothing but a negation of the rights of the state governments to raise funds for their developmental efforts.
The borrowings, off-budget borrowings, may make an impact on the revenue deficit and fiscal deficit and thus affect the targets set for fiscal indicators under the state Fiscal Responsibility and Budget Management (FRBM) Act-2003 that mandates the central government to bring down its fiscal deficit to 3% of GDP. It is to be noted that the centre is also equally responsible for complying with the Fiscal Responsibility and Budget Management Act, 2003. And it has been violated by the centre at their convenience. The Quantum of the Debt of the Centre needs to be seen. It’s fiscal mismanagement too.
What is the track record of the Modi Govt on the FRBM Act? It is deplorably weak. In 2017, Finance Minister Arun Jaitley deferred the fiscal deficit target of 3% of the GDP and chose a target of 3.2% citing the NK Singh committee report. The Comptroller and Auditor General of India (CAG) pulled up the government for deferring the targets which it said should have been done through amending the Act. Immediately Central Govt amended the bill. The amendment allows the govt to relax the fiscal deficit target by up to 50 basis points or 0.5 per cent. Using the escape clause, the present Finance Minister revised the fiscal deficit for FY-20 to 3.8 per cent. Soon it was also dispensed with. In 2021-22, the government has not even provided a target for the next three years and will amend the FRBM Act to accommodate the higher fiscal deficit.*
The union budget had projected a fiscal deficit of 6.4 per cent to GDP for the current financial year. Namely, the union govt itself is unable to comply with the FRBM Act. And what’s more, the government has not been in a position to do a balancing act, maintaining growth and macro-economic stability by keeping fiscal and current account deficits within manageable limits. It means that the fiscal management of the Union Govt has been in a bad shape.
India’s external debt rose by 8.2% to $620.7 billion at the end of March 2022 from a year ago, the Reserve Bank of India said on 30 June 2022. There are risks inherent in all forms of raising funds, which applies to the union govt too as it goes for borrowing. Accordingly, here, the parameters to avail the loans need to be alike whether it is Centre or State Governments. First of all, the centre has to set a model of good fiscal discipline saying no to its fiscal profligacy. Thereby, the centre can teach professional fiscal management to the states. The centre has been centralising the power in all respect, having attempted to subvert the centre-state financial relations. The centre makes the states into slaves in terms of financial matters.
The borrowings need not be regarded as harmful in terms of making the economy dynamic. The committed expenditures are natural. Now the centre has declared a 4% hike in DA and such hikes will reflect on committed expenditure. At the same time, increased salary will help to pump the liquidity in the market, which makes the economy dynamic.
What about the Centre-led economy? Is it a dynamic one? There is a study that says the Indian domestic market has been in a pathetic state. Liquidity hardly gets pumped into the market because the power of spending of the general public has weakened in the light of the Pandemic that caused a huge loss of income for the people. The gap between spending and savings has been widening due to the incurred income loss. Whereas, the cost of living has been skyrocketing subject to higher inflation. Simultaneously, the burden of debt gets mounted day by day. As a result, hardly any saving is left in the hands of the people. Such a downturn in the financial condition forces people away from spending except for daily basic needs.
It is a well-recognised fact that the pandemic, geopolitical conflict and the consequent supply side disruptions have caused an upside risk to the fiscal deficit and all are reflected in mounting debt levels too. And some State Govts have been forced to cut excise duties on petrol and diesel and it has resulted in a huge revenue loss for the respective states. The higher subsidy allocation for fertilisers to cushion the impact of the rise in international prices also poses a risk to the budgeted fiscal deficit. How states can fund their expenditures in such a situation, with a compressed borrowing space, remains to be a quandary.
There is a situation of growing expenditure requirements and a poor yield of revenue sources for states in India. The borrowing has been considered to be a stimulus to accelerate the pace of the economy and it will be to push capital expenditure which will have a multiplier effect on the economy. Having not taken into such facts, the Centre makes the states depend on the limited allocation of the Centre. The union Govt here destabilises the financial entity of the state governments under the disguise of the rectification of poor fiscal management. It is nothing but a blatant breach of the true spirit of Centre-State relations mentioned in Part XI of the constitution. The centre has here also been devising tactics for power centralisation subverting the essence of the Indian Federal system.
Huge lending to big corporates and writing off huge NPA and ageing bad loans are on the rise. But the union govt or RBI keeps mum on it. Whereas, the banks are strictly bridled in the lending to the states. The union govt, which is engrossed in fiscal profligacy, makes the states reminded of the need for fiscal discipline!
* Courtesy: Dr Sebastin Chittilapilly