Debts of the Governments : While the Union Government of India is mandated to borrow inside and outside the country the amount specified by the Parliament (Article 292), States are mandated (Article 293) to borrow only inside the country.
Public Debt of India : The liabilities of the Centre have three segments of it, namely—Internal Liabilities, External Liabilities, and Public Account Liabilities. To the extent Public Debt of India is concerned, it includes only Internal and External liabilities incurred by the Central Government.
Adjusted Debt : In 2010, Government articulated the concept of adjusted debt which indicates the debt amount after factoring in the impact of external debt (at current exchange rate of rupee) and netting out Market Stabilization Scheme and NSSF (National Small Savings Scheme) liabilities not used for financing the deficit of the Central Government. While analyzing the General Government Debt, 14 days T-bills investment by States and Central loans to State Governments are also netted out to avoid double accounting.
INDEPENDENT DEBT MANAGEMENT
Debt management has been in news for some time now. Rather the idea for a public debt management agency (PDMA) was proposed in the Union Budget 2015-16 itself it was put on back burner probably due to clear objections from the Reserve Bank of India (RBI).
By March 2019, the issue of having an independent debt management agency outside the preview of the RBI was again voiced by the policy think tank, the NITI Aayog, saying it was an idea whose time has come.
It is believed that once the debt management office is separated from the RBI the Government will be able to pay much more attention on the aspect of debt having an eye on the changing needs of fund over the time. It will help the Government to cut the cost of fund also.
CENTRAL GOVERNMENT DEBT
The debt liabilities of the Central Government include all borrowings of the government contracted against the Consolidated Fund of India (technically defined as 'Public Debt'), as well as liabilities in the Public Account of India.
These liabilities include external debt but exclude part of the NSSF (National Small Savings Fund) liabilities to the extent of States' borrowings from the NSSF and investments made out of the NSSF, which do not finance Central Government deficit.
CENTRAL TRANSFER TO STATES
States in the country enjoyed comparatively lower financial headroom in comparison to the Centre. However, this issue was addressed by the upcoming Finance Commissions is a very progressive way, either by higher devolution from the central pool of taxes or grants-in-aids.
During the period of economic reforms, states got new tools to mobilise resources but on the terms of increased responsibilities and transparency. But still, States keep facing fiscal pressure due to various reasons.
Far-reaching changes were made by the 14th Finance Commission (for the award period 2015-20') to strengthen fiscal federalism in the country.
The total transfers from Centre to States have risen both in absolute terms, and as per cent of GDP—increased between 2014-15 ('6.66 lakh crores) and 2018-19 ('12.38 lakh crores) accounting for 1.2 per cent of the GDP.
States are on the fiscal glide path, rather in past few years, they have felt increased fiscal pressure. The fiscal constraints have been caused by several microeconomic factors such as falling tax revenues together with certain new policy actions like farm loan waivers and direct income support transfers to the farmers.
Major details related to the fiscal situation of States in 2019-20 are being briefed below : (i) Tax Revenue : As per 2019-20 budget estimates of the State Governments, the States' combined own Tax revenue and own Non-Tax revenue is anticipated to grow at 11.1 per cent and 9.9 per cent respectively, which is low relative to the robust growth displayed in 2018-19. (ii) Expenditures : The envisaged growth of 8.4 per cent in total expenditure in 2019-20 with respect to 2018-19 is largely led by 9.4 per cent growth in revenue expenditure, whereas the capital expenditure is placed to grow at only 3.7 per cent. (iii) Fiscal Path : States continued to follow the path of fiscal consolidation and contained the fiscal deficit within the targets set out by the FRBM Act. For the year 2019-20, the States have budgeted for gross fiscal deficit of 2.6 per cent of GDP as against an estimate of 2.9 per cent in 2018-19 and 2.4 per cent in 2017-18. (iv) Pattern of Deficit Financing : States' pattern of deficit financing has changed over the years— dependence has been increasing on market borrowings. Fiscal deficit financing by them via market borrowings has increased from 61.6 per cent in 2015-16 to 73.7 per cent in 2018-19 and is further expected to rise to 87.9 per cent in 2019-20. (v) Debt to GDP Ratio : The debt to GDP ratio of States has risen since 2014-15 (22 per cent of GDP) owing to three main reason, namely— the issuance of 'UDAY Bonds' (to finance the UDAY Scheme) in 2015-16 and 2016-17; farm loan waivers; and the implementation of the 7th Pay Commission awards. (vi) Borrowing Ceiling : For States, the borrowing ceiling for the year 2019-20 was fixed at '6,11,186 crores anchored with 3 per cent fiscal deficit target of the GDP of the respective states (as was recommended by the 14th Finance Commission for the period 2015-20). (vii) Additional Borrowing Window : On March 13, 2020, the Centre allowed States to borrow an additional amount of '58,843.42 crore in 2019-20. This new 'one-time' window would now imply that states get an additional headroom to borrow over and above the 3 per cent fiscal deficit ceiling stipulated in their FRBM laws to the extent of the extra devolution amount in 2018-19.
GENERAL GOVERNMENT FINANCES
Though States are also following their fiscal responsibility laws enacted by them, but they also have been facing pressure on fiscal front due to a variety of reasonable and populist reasons. Deterioration in States fiscal position ultimately drains the resources of the Centre and the overall fiscal situation of the economy gets deteriorated.
The General Government is expected to continue on the path of fiscal consolidation as the fiscal deficit of General Government was expected to decline from 6.2 per cent of GDP in 2018-19 to 5.9 per cent of GDP in 2019-20. However, the combined liabilities of Centre and States have increased to 69.8 per cent of GDP by end-March 2019 from 68.5 per cent of GDP of end-March 2016.
OUTLOOK FOR 2020-21
In the wake of global slowdown, ongoing trade tensions and slowing growth of the Indian economy, the fiscal situation in the financial year is supposed to remain subdued and challenging. The major concerns in this regard are bein briefed below : (i) Subdued growth prospects of the global economy added with escalated trade tensions (especially between USA and China) and protectionist trade policies of many developed countries the biggest global variable on the fiscal front. (ii) Economic slowdown faced on the domestic front poses an imminent danger of subdued revenue collections for the governments. In order to boost the sluggish demand and consumer sentiments, timely and effective counter-cyclical measures (i.e. the measures which boost demand) need to be taken by the Government. Such actions from the Government look quite challenging given the falling Government revenue (iii) During 2019-20 (first 8 months), the indirect tax collections remained muted. Thus, revenue buoyancy of GST would be key to the resource position of both Central and State Governments. (iv) On the expenditure side, rationalisation of subsidies especially food subsidy could be an important tool for expanding the headroom for fiscal manoeuvre. (v) The recommendations of the 15th Finance Commission (Interim Report-2020), especially on tax devolution would have implications for Central Government finances. (vi) The unfolding geopolitical situations in West Asia is likely to have implications for oil prices and thereby on the petroleum subsidy. This variable may extend the country's current account deficit. (vii) The COVID-19 (Corona Virus 2019) emerged as new variable impacting the global and domestic economic prospects in an unprecedented way. By late-March, the global value chain had been badly ruptured with many countries reporting scarcity of highly essential goods such as lifesaving medicines.
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