News: Rising fiscal indiscipline among the Centre and States.
GS Paper 3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Two kinds of public expenditure:
- Mandatory spending is an expenditure that is governed by formulas or set criteria set, rather than by periodic estimation. For Example, the Current year’s expenditure is based on the expenditure of the previous year’s spending bill.
- Expenditure that is governed through annual or other periodic appropriations is known as discretionary spending. The Center is limiting States to focus on mandatory expenditures. Center is reducing the scope for discretionary spending and pushing for more fiscal discipline among states. On the other hand states are demanding more fiscal space for increasing discretionary spending.
Issues arises due to discretionary public spending:
- More volatility in discretionary expenditure than mandatory expenditure.
- Correlation is low for discretionary expenditure with output growth and will be low for the next immediate time period.
- Chances of fiscal stress due to discretionary expenditure as discretionary expenditure once started led to increase demand in the economy and if continues for longer periods leads to fiscal stress.
Challenges in sub-national fiscal correction:
- Resistance from the public: In most cases discretionary government spending raise the private consumption, and to counterbalance measures faced the public resistance.
- Implementation of central welfare schemes often ends up in shifting the blame, mostly in cases when center and concerned states have different political parties in power.
- Magnified fiscal slippages in a federal system as States’ fiscal stress gets spilled over to the Centre.
- Many States indulge in ‘models of welfare provisioning’ even after there is ambiguity in effect of such expenditure on growth of economy and well-being of the beneficiaries.
- States failed to adhere to the fiscal responsibility legislation target due to their dwindling revenue receipts.
- According to RBI implementation of the Ujwal DISCOM Assurance Yojana (UDAY), farm loan waivers, sustained increase in populist welfare measures and growth slowdown especially in 2019-20 led to upward movement of outstanding debt. Debt-GSDP ratio of States increased from 22.6 in 2013 to 25.1 in 2018, and further to 31.2 in 2022 (budget estimates).
- Fiscal correction at the State level.
- Expenditure polarization and raising additional resources at the sub-national level.
- To maintain frictionless cooperative federal structure center needs to demonstrate commitment to fiscal discipline by sticking to the announced fiscal glide path.
Sources: The Hindu
- The Hindu: https://bit.ly/3x636Jh ; Author: M. Suresh Babu