A lot of attention from around the country will be focused on what sort of Budget Union finance minister Pranab Mukherjee presents on Friday, especially whether he begins the necessary work of bringing down the fiscal deficit to more tolerable levels.
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Far less attention has been traditionally paid to the state of state finances. That’s a pity, because what really matters when it comes to assessing the financial stability of a country is the consolidated fiscal deficit of the Centre and the states. So the new study on state finances released by the Reserve Bank of India on Monday is a timely reminder that state governments, too, have seen budget imbalances grow after the economic downturn.
The budgeted gross fiscal deficit of the states as a percentage of total state gross domestic products is 3.2. That’s twice the actual level of 2007-08, and when added to the Central deficit, gives us a national fiscal deficit of at least 10% of gross domestic product. That’s too high for comfort.
There are other strands of worrisome news. State debt has grown faster than output and many states have budgeted for revenue deficits this fiscal. Such deterioration in public finances at the state level comes after improvement through much of the last decade, which allowed the states to meet most of the fiscal fitness goals recommended by the 12th Finance Commission even before the targeted 2008-09.
There are very clear macroeconomic reasons why the states must give company to the Centre in trying to get their finances in order from the next fiscal. But there are some issues of political economy as well.
The states already live in the fear that the introduction of the single nationwide goods and services tax will hurt their revenues. Stressed finances could add to these fears— however irrational they are— and thus become a major roadblock to what is perhaps the most important reform measure on the table right now.
A federal system such as ours needs well-governed and financially stable states. There were huge improvements in state finances till recently. It is time to get back to the path of prudence.
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