Fiscal Management Challenges and Strategies in Centre-State Relations in India

Summary & Important Points

• Public Debt Management: Rising attention in Centre-State financial relations, especially with the Sixteenth Union Finance Commission's formation and Kerala's Supreme Court suit against the Centre's borrowing ceiling decision.

• Call for Asymmetric Fiscal Rules: A need for differentiated fiscal rules considering the diverse fiscal capacities and needs of Indian states.

• Post-COVID Fiscal Strategy: Targets include a fiscal deficit to GDP ratio of 3.5% for states, with specific portions tied to reforms, aiming for a general government public debt to GDP at 60%.

• Kerala's Debt Profile: Kerala's outstanding liabilities stand at 36.9% of GSDP, with a significant part of the debt maturing by 2025, indicating a lower roll-over risk.

• Revenue Stability and Fiscal Marksmanship: Kerala's tax revenue performance below budget estimates, highlighting fiscal management challenges.

• Volatility and Fiscal Transfers: Concerns over volatility in fiscal transfers from the Centre, with a notable decline in Kerala's share from Finance Commission transfers.

• Investment Focus: Emphasis on investing in digital, physical, and social infrastructure to support sustainable economic development.

• Fiscal Policy and Inflation: The role of fiscal policy in containing inflation and supporting food security during crises.

• Negotiations with the Finance Commission: The need for strategic negotiations to address state-specific issues and secure favorable fiscal transfers.

• Gender Budgeting: Importance of advancing gender budgeting to address gender inequalities and promote economic growth through increased female labor force participation.

Additional Information

• Equity vs. Efficiency in Fiscal Transfers: Debate over the principles guiding intergovernmental fiscal transfers, with a focus on economic convergence and the impact of the Finance Commission's formula on growing states like Kerala.

• Digital Infrastructure in Public Finance: Strengthening digital infrastructure is paramount for increasing the tax effort and managing public debt effectively.

• Sustainable Development: The need for a State adaptation communication and budget allocations for transitioning to a green, resilient, and knowledge-based economy.

• Fiscal Austerity Measures: The potential impact of austerity measures on human capital formation and economic recovery, highlighting the need for balanced fiscal management strategies.

Reason it's important : The Finance Commission and public finance in Kerala

Published in : The Hindu

Date appeared in newspaper : 01 April 2024

Link to the article (might require a paid subscription) : https://www.thehindu.com/todays-paper/2024-04-01/th_international/articleGVOCK2VRQ-6309436.ece