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Pic: Reuters (REUTERS)
Pic: Reuters (REUTERS)

IMF advocates contingency reserves for Indian states

  • The IMF said an adequate contingency reserve would amount to 2% or 3% of total expenditure
  • As per former chief statistician Pronab Sen, one has to be very careful, otherwise such expenditures become discretionary

NEW DELHI: At a time state governments are facing increasing fiscal pressures due to mounting pandemic related expenditure demands amid falling revenue collections, the International Monetary Fund (IMF) has advocated states such as Tamil Nadu should build contingency reserves to meet unforeseen expenditure demands.

“A contingency reserve or planning margin could be established for new initiatives to provide flexibility. A Tamil Nadu Contingency Fund of Rs1.5 billion, or less than 0.1% of total expenditure, already exists in the budget. Although this fund may handle some limited unforeseen expenditure, it is not appropriate for substantial policy priorities that emerge during the fiscal year," IMF said in a report on ‘Modernising budget formulation and managing fiscal risks’ of Tamil Nadu. The report was published Friday.

The IMF said an adequate contingency reserve would amount to 2% or 3% of total expenditure. “Its rules of engagement should be carefully designed so that allocating the contingency reserves does not turn into an alternative budget preparation exercise," it said in the report.

A contingency reserve is a mechanism to address uncertainties, linked with fiscal risks, during execution of the prepared budget for the year. IMF said it can take several forms. In many countries, it is an unallocated appropriation in the annual budget law. In other countries, it is a fund with an appropriate amount of financing authorized under the legal framework and replenished at the beginning of each fiscal year, depending on the drawdown during the previous year.

The benefit of such an appropriation is that urgent but unforeseen needs can be met without seeking additional appropriations or having to cut spending elsewhere, which may lead to the accumulation of arrears. While the UK and Turkey have contingency reserves of less than 1% of their total expenditure, Canada (close to 2%), Russia (3%), and Philippines (8%) have much higher reserves.

“The size of the contingency reserve should not be so large as to undermine budget discipline or so small as to be consistently exhausted part way through the year. In most countries, this size implies a contingency appropriation of between 1% and 3% of total budgeted expenditure," the multiletaral funding agency said.

Speaking to Mint, former chief statistician of India Pronab Sen said State Disaster Response Fund (SDRF) at the state level and National Disaster Response Fund (NDRF) at the national level are essentially meant for such contingency expenditures.

Speaking to Mint, former chief statistician of India Pronab Sen said State Disaster Response Fund (SDRF) at the state level and National Disaster Response Fund (NDRF) at the national level are essentially meant for such contingency expenditures.

“Disaster has to be declared for use of such funds. Contingencies are in the eye of the beholder while a disaster you can see and explain. I agree that disaster relief funds and their ambit should be expanded. But it should not be for any and all expenditure. One has to be very careful, otherwise such expenditures will be completely discretionary," he added.

SDRFs are used only for meeting the expenditure to provide immediate relief to the victims of cyclone, drought, earthquake, fire, flood, tsunami, hailstorm, landslide, avalanche, cloud burst and pest attack.

Of the total contribution for SDRFs, the central government contributes 75% for general category states and 90% for special category states of the total yearly allocation in the form of a non-plan grant. The balance 25% in case of general category states and 10% in case of special category states is contributed by the state government concerned.

Expenditure from NDRF is meant to assist states to provide immediate relief in those cases of severe calamity, where the expenditure required is in excess of the balance in the state’s SDRF. Expenditure on disaster preparedness, restoration, reconstruction and mitigation are not part of SDRF or NDRF and are met from the plan funds.

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