In this week’s column for Mint, Niranjan Rajadhyaksha makes a case for a relook at Indian states' fiscal responsibility laws.
"A new RBI working paper by Sangita Misra, Kirti Gupta and Pushpa Trivedi casts light on some of the emerging issues in sub-national fiscal policy. State governments have generally tried to keep their fiscal deficits within the limits imposed by their fiscal responsibility laws (FRL), often by cutting essential expenditure. Yet, state debt burdens have been rising because of contingent liabilities. States have also been exposed to fiscal shocks. The authors have highlighted an important policy issue: “It may be pertinent to review the FRL adopted by the states in the 2000s, much the same way the Centre revised their [Fiscal Responsibility and Budget Management rules] in the 2018-19 Union Budget, whereby debt was explicitly added as a target variable along with fiscal deficit. This is particularly desirable considering the fact that while the fiscal deficit of states remains well within their FRL threshold of 3% for [gross fiscal deficit] to [gross domestic product] ratio, as adopted during the early 2000s, the debt is rising at a high pace, crossing corresponding implicit thresholds." Is it time to relook at our state fiscal responsibility laws?"
Read the complete article here.