OPEN APP
Home >Politics >Policy >India caps state govts’ deficit to curb reckless spending
Continued fiscal consolidation is key to protecting India’s credit rating and winning more interest-rate cuts from RBI governor Raghuram Rajan. Photo: Aniruddha Chowdhury/Mint
Continued fiscal consolidation is key to protecting India’s credit rating and winning more interest-rate cuts from RBI governor Raghuram Rajan. Photo: Aniruddha Chowdhury/Mint

India caps state govts’ deficit to curb reckless spending

State governments will have to limit the gap to 3% of their GDP in a financial year, Frank Noronha, the govt's spokesman, wrote on Twitter

New Delhi: Prime Minister Narendra Modi’s administration approved a proposal to cap states’ budget deficits as it looks to shrink Asia’s widest shortfall.

State governments will have to limit the gap to 3% of their gross domestic product (GDP) in a financial year, Frank Noronha, the federal government’s spokesman, wrote on Twitter. The state governments can exceed the target by 0.5 percentage point if they keep interest payments and the debt-GDP ratio within specified limits.

Continued fiscal consolidation is key to protecting India’s credit rating and winning more interest-rate cuts from Reserve Bank of India (RBI) governor Raghuram Rajan. At the same time, states also need room to manoeuvre under a plan to reorganize about $5 trillion of debt piled up at power utilities.

The move to cap the states’ fiscal deficit is based on the recommendation of the finance commission, a panel that decides every five years how tax revenues should be divided between the federal and state governments. The government had earlier implemented the panel’s advice to share a record 42% of total tax collections with states instead of 32%.

Modi has been advocating for greater autonomy of states and increased coordination with the federal government to ensure faster project approvals and boost investment. Bloomberg

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.

Close
×
Edit Profile
My Reads Redeem a Gift Card Logout