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Transforming Bharat into Ram Rajya - Redraw Fiscally Sustainable Path

JANUARY 31, 2024

By TIOL Edit Team

INTERNATIONAL Monetary Fund (IMF) and the Reserve Bank of India (RBI) have done well to separately stir India's fiscal responsibility pool.

The latter has done this in its two recent reports -'Report of the Working Group (WG) on State Government Guarantees' and its annual document titled 'State Finances-A Study of Budgets of 2023-24'. The former did this in its annual 'Country Report' on India for 2023.

The combined reading of their three reports suggests that the fiscal water is opaque and is contaminated with policy paralysis. The fiscal pool also suffers from breaches of all sorts.

We urge both the Centre and the States to pay heed to observations and recommendations contained in these reports. Their collective action in the domain of fiscal transparency and accountability willpavea clear and well-cemented road towards Amrit Kaal.

Consider first the IMF report. It has pitched four key issues before Ministry of Finance. A key issue is the need for "Fiscal policy to ensure medium-term sustainability while boosting inclusive growth."

The report says: "An ambitious fiscal consolidation path is needed to replenish buffers and sustainably lower debt, while supporting inclusive growth." It has rightly identified improvement in revenue receipts and expenditure efficiency as two pillars for supporting fiscal consolidation. As for revenue, it has mooted restructuring & simplification of GST rates in tabular form. We hope GST Council would ponder over this prescription.

As put by the Report, "Reforms to the GST would raise revenue efficiently, with minimal distortions to growth drivers e.g., investment decisions. Other revenue

measures include reversing the fuel excise tax cuts, further broadening the corporate and personal income tax bases, and continued improvements in tax administration."

The Report had done plain-speaking on prolonged fiscal laxity and resulting risks in one of the annexures. It notes: "Even prior to the pandemic, the fiscal anchors specified in the framework were repeatedly breached."

It thus cautions policy-makers: "Given the shocks that India has experienced historically, and instances of fiscal slippages between 2000 and 2020, the baseline carries the risk that, should similar shocks materialize, debt would exceed 100 percent of GDP in the medium term. Reaching the authorities' deficit target in FY2025/26 and then maintaining further fiscal tightening would rebuild buffers at a faster pace, safeguarding against shocks."

Under the baseline scenario, it has project ed increase in public debt (which implies combined debt of the Centre & States) to 82.3% of GDP in 2024 from 81.9% in 2023. The projection for 2032 is 76.4%.

The Report has a lot more of observations & suggestions that deserve attention of all visionaries aspiring to transform Bharat into Ram Rajya at the earliest.

Let us now shift to RBI reports. Consider first the annual study on State Finances.

Acknowledging the notable improvement in combined fiscal profile of States in 2021-22 and 2022-23, the Study observes: "States need to address several challenges to fiscal sustainability" over the medium term.

The Study has wisely flagged few States' risky return to the fiscal burden-creating return to the Old Pension Scheme (OPS) for government employees. It has noted reports of some other states moving to embrace OPS.

As put by the Study, "internal estimates suggest that if all the State Governments revert to OPS from the National Pension System (NPS), the cumulative fiscal burden could be as high as 4.5 times that of NPS, with the additional burden reaching 0.9 per cent of GDP annually by 2060."

It warns: "any reversion to OPS by the States will be a major step backwards, undermining the benefits of past reforms and compromising the interest of future generations."

The Study has also listed several other issues such as preventing leakage of mining revenue that States should focus for sustaining fiscal consolidation.

Let us now see what RBI WG on State Government guarantees recommends. It has suggested that the word 'Guarantee' should be used in a broader sense. The guarantee" may include instruments, by whatever name they are called, if these create obligation on the part of the Guarantor (State) for making payment on behalf of the borrower (State Enterprise) at a future date, contingent or otherwise ".

The WG report has called for "a reasonable ceiling on issuance of guarantees" as their invocation could lead to "significant fiscal stress on the State Governments". The Group has thus recommended a ceiling for incremental guarantees issued during a year at 5 per cent of Revenue Receipts or 0.5 per cent of GSDP, whichever is less.

It has also recommended that the states should classify the projects/ activities as high risk, medium risk and low risk and assign appropriate risk weights before extending guarantees.

WG adds: "Such risk categorisation should also take into consideration past record of defaults. The states should conservatively keep the lowest slab of risk weight at 100 per cent. Additionally, states should disclose their methodology for assigning the risk weights ."

According to WG, "Guarantees or contingent liabilities are potential liabilities that depend on the occurring of an unforeseen future event. If these liabilities are realised without having adequate buffer, it may imply increase in expenditure, deficit and debt levels for the State Government. It is, therefore, important to assess, monitor and be prudent while issuing guarantees. Besides, State Governments need to be consistent and transparent in terms of disclosure of information on guarantees".

Apart from these three reports, the Centre and States should jointly consider forgotten or ignored suggestions from diverse quarters.

The fiscal reforms cupping would overflow if we were to factor in unimplemented and still relevant recommendations of successive Finance Commissions, Comptroller and Auditor General (CAG) reports and different official committees.

We urge the Centre to draw motivation from Ram Mandir as well as Sengol to prepare the fiscal blueprint for welfare & justice for all, happiness for all and wealth for all in eagerly-awaited Ram Rajya.


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