Jaitley said national focus is on larger expenditure on social sector, infrastructure creation and rural areas, which have conventionally been found lacking in the past.
Finance Minister Arun Jaitley and MoS for Finance, Jayant Sinha during the second conference of the State Finance Secretaries, in New Delhi on Monday. (Source: PTI)
The government may have last week given nod to states for extra borrowing, but it wants them to spend within the fiscal limits and adhere to fiscal discipline. Finance minister Arun Jaitley wants states to do meaningful spending, focused on developmental activities in rural infrastructure and social sector, which were the thrust areas of 2016-17 Union Budget as well.
“It is quite obvious that what states were getting in Thirteenth Finance Commission and what they are getting now, it may have come down in one-two heads but substantially other overall volumes have increased. Now an important onus on us is to actually spend and then make sure how and where we spend it. The tendency to spend it on non-developmental activities may in the short term appear to be attractive but in longer run it doesn’t reap results,” Jaitley said while addressing the second conference of states’ finance secretaries.
“There is now an important national focus that larger expenditure must be done in the social sector.. into infrastructure creation, into rural areas..which have conventionally been found lacking in the past..and therefore we must focus on specific expenditure in those areas,” he said adding that though states have been given some additional fiscal space but they will have to learn to live and spend within means and stick to fiscal discipline.
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Jaitley even highlighted that ever since India has shown the tendency of spending more yet sticking to fiscal discipline, it has brought immediate results in terms of interest rates and credibility.
The Union Cabinet last week approved additional headroom to a maximum of 0.5 per cent over and above the normal fiscal deficit limit of 3 per cent in any given year to the states. Subject to fulfillment of conditions as specified in the Fourteenth Finance Commission (FFC) recommendations, states will be given year-to-year flexibility for relaxing fiscal deficit beginning 2016-17.
States should have had no revenue deficit this year and in the preceding year. The states will be eligible for flexibility of 0.25 per cent over and above the fiscal deficit limit of 3 per cent of GSDP if their debt-GSDP ratio is
less than or equal to 25 per cent in the preceding year.
States will be further eligible for an additional borrowing limit of 0.25 per cent of GSDP this year if the interest payments are less than or equal to 10 per cent of the revenue receipts in the preceding year.
In line with recommendations of Fourteenth Finance Commission, the states’ share in Union taxes has risen sharply by 10 per cent since last year to 42 per cent.
Fiscal discipline of states is important in view of its corresponding impact on Centre’s borrowing space and thus, the country’s fiscal deficit. For instance, post October 2015, too many government securities were simultaneously off-loaded by the state governments to meet their normal borrowing requirements, resulting in higher yields on state development loans as compared to central government securities. Having learnt from this experience, the government has now proposed a better coordinated and more evenly spaced borrowing schedule over the financial year 2016-17.
According to RBI data, States borrowed a total of Rs.2.95 lakh crore last year, around 23 per cent higher than a year ago, while Centre’s gross borrowing stood at Rs 6 lakh crore in last fiscal.
The government has now realigned its focus on combined fiscal situation of both states and Centre. Finance secretary Ratan Watal said there is a need to stop looking at Centre and States separately. “We need to take a national view of the problem, and start looking at the general government deficits and the impact they have on the savings-investment equilibrium in our economy as well as internal and external balances.” He further added, “To grow in a sustainable manner we need to maintain a fine balance between crowding-in and crowding-out.”
The combined fiscal deficits of states and Centre have hovered over 9 per cent of GDP during 2001-02 and 2002-03, after which it saw a steady decline, falling to one of the lowest levels of 4 per cent in 2007-08. Subsequently, combined fiscal deficit of states and Centre has risen to around 7.2 per cent of GDP in 2012-13 and 6.8 per cent of GDP in 2013-14. In 2014-15, the fiscal deficit of states and Centre was estimated at 6.9 per cent of GDP, which declined to around 6.3 per cent of GDP in 2015-16.
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