Home >News >India >IMF bats for states to have adequately equipped contingency reserves

NEW DELHI : The International Monetary Fund (IMF) has said that states such as Tamil Nadu must build contingency reserves to meet unforeseen expenditure.

In a report on Tamil Nadu, titled ‘Modernising budget formulation and managing fiscal risks’, published on Friday, the IMF said contingency reserves or a planning margin could be established for new initiatives to provide flexibility. “A Tamil Nadu contingency fund of 1.5 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. An adequate contingency reserve would amount to 2% or 3% of total expenditure," IMF said.

“Its rules of engagement should be carefully designed so that allocating the contingency reserves does not turn into an alternative budget preparation exercise."

The IMF’s observations come amid heightened fiscal pressure on Indian states due to the massive increase in covid-19-related expenditure, and falling revenue collections.

A contingency reserve is a mechanism to address uncertainties linked with fiscal risks, and is prepared with the annual budget. 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, it added.

While the UK and Turkey have contingency reserves of less than 1% of total expense, Canada (close to 2%), Russia (3%), and the 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."

Former chief statistician of India, Pronab Sen, said state disaster response funds (SDRF) and national disaster response fund (NDRF) 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. 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."

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