Roadmap for Answer Writing

1. Introduction (Brief Overview)

• Contextualize the Issue: Start by mentioning the ongoing fiscal challenges faced by Indian states, especially post-pandemic. Acknowledge the importance of fiscal health for states and the initiatives taken by the government to address this issue.
• Mention Key Challenges: Highlight that while several measures have been taken, certain structural challenges persist.

Key Fact to Use:
“In 2020-21, the states’ gross fiscal deficit (GFD) was 4.1% of GDP and their debt-to-GDP ratio stood at 31.1%, well above the targets set by the FRBM review committee (20%)” (Source: Government of India, Ministry of Finance).

2. Discuss Initiatives for Improving Fiscal Health

• Special Assistance Scheme: Mention the scheme providing ₹1,00,000 crore interest-free loans for capital investments aimed at improving fiscal health.
• Borrowing Flexibility: Discuss the reform-linked additional borrowing space given to states for power sector reforms.
• Inclusion of Off-Budget Borrowings: Explain how the inclusion of borrowings by state government entities helps in improving transparency and financial discipline.

Key Fact to Use

“The Special Assistance Scheme for Capital Investment has provided ₹1,00,000 crores in interest-free loans for 50 years, which has been used to fund capital investments by states” (Source: Ministry of Finance, Government of India).

3. Key Challenges to Address (Subheadings for Each Challenge)

a. High Fiscal Deficit and Debt Levels

• Despite the reduction in fiscal deficit to 3.4% in 2022-23, it remains above the FRBM target of 3%.
• The Debt-to-GDP ratio remains high at 29.5% in 2022-23, still above the recommended 20%.

Key Fact to Use:
“States’ fiscal deficit is projected at 3.4% of GDP in 2022-23, still higher than the FRBM target of 3%” (Source: Budget Documents, Government of India).

b. Increasing Share of Cess and Surcharge

• The Centre’s increasing reliance on cess and surcharge reduces the share of tax revenue devolved to states, impacting their fiscal space.
• The share of cess and surcharge in total tax revenue has increased from 8% in 2011-12 to around 28% in 2021-22.

Key Fact to Use:
“The share of cess and surcharges in total tax revenue has risen from around 8% in 2011-12 to nearly 28% in 2021-22” (Source: Ministry of Finance, Government of India).

c. Dominance of Committed Expenditures

• A large portion of state budgets is used for committed expenditures like salaries, pensions, and interest payments, crowding out development spending.
• In 2022-23, 54% of states’ revenue receipts are earmarked for such expenditures.

Key Fact to Use:
“In 2022-23, states budgeted 54% of their revenue receipts for committed expenditures such as salaries, pensions, and interest payments” (Source: Reserve Bank of India).

d. Low Own Revenue Generation

• Many states struggle with low own revenue due to weak financial performance of state-owned enterprises, power distribution companies (discoms), and inefficient tax collection systems.
• The lack of proper user charges and high administrative costs also impede revenue generation.

Key Fact to Use:
“Many states face low own revenues, with state-owned enterprises and discoms posting significant losses. This results in lower revenue collections from taxes” (Source: NITI Aayog Reports).

e. Populist Schemes and Fiscal Stress

• States have launched several populist schemes such as farm loan waivers and the old pension scheme, which increase long-term fiscal commitments, adding to fiscal stress.

Key Fact to Use:
“Populist measures such as farm loan waivers and the implementation of old pension schemes have contributed to fiscal strain in many states” (Source: Indian Economic Survey).

4. Recommendations and Way Forward

• Debt Consolidation: Emphasize the need for states to prioritize debt consolidation to avoid further strain on their fiscal health.
• Private Sector Engagement: Suggest that states should create a favorable environment for private investment and inter-state trade to promote economic growth and reduce fiscal pressure.
• Better Tax Administration: Advocate for the reform of state-level tax systems to improve revenue generation and ensure efficient tax compliance.

Key Fact to Use:
“States need to focus on encouraging private sector investment and improving inter-state trade to leverage the benefits of capital expenditure” (Source: NITI Aayog).

5. Conclusion

• Summarize the key challenges and reiterate the importance of addressing these issues to achieve sustainable fiscal health in states.
• Emphasize the role of continuous reforms and fiscal discipline in managing state finances.

Summary of Relevant Facts:

1. Fiscal Deficit & Debt Levels: In 2020-21, GFD was 4.1% and Debt-to-GDP ratio was 31.1% (Source: Ministry of Finance, Government of India).
2. Special Assistance Scheme: ₹1,00,000 crore interest-free loans for 50 years to improve state finances (Source: Government of India).
3. Share of Cess and Surcharge: From 8% in 2011-12 to 28% in 2021-22 (Source: Ministry of Finance, Government of India).
4. Committed Expenditures: 54% of revenue receipts used for committed expenditures in 2022-23 (Source: Reserve Bank of India).
5. Populist Programs: Farm loan waivers and old pension schemes contributing to fiscal stress (Source: Indian Economic Survey).