BUDGET ON A TIGHT LEASH
Context: With just about a fortnight to go for the State Budget, Chief Minister B.S. Yediyurappa is learnt to be under pressure not to announce any big-ticket schemes owing to the precarious situation of the State treasury.
- Finance Department officials have advised the Chief Minister not to announce schemes that will burden the State finances
- This advice has come multiple times from multiple revenue-generating departments within the Finance Department.
REASONS FOR THE FUND SHORTFALL
- The Chief Minister acknowledged that the State was staring at a shortfall from the central funding.
- We are estimating a shortfall of 10,000 to 11,000 crore from the Central funds.
- The funds from the Centre through the share of State in GST or devolution has affected the budget planning
- Another big effect was owing to the loan waiver scheme implemented by the previous Janata Dal (Secular)–Congress regime
- The revenue-earning departments such as Stamps and Registration, Excise, and Transport may not achieve the target completely, giving further trouble in planning the Budget.
- The State has received 8,851 crore as GST compensation as against the expected 17,249 crore, and the Centre’s devolution of funds to State was expected to come down from 39,591 crore in 2019–20 to 28,598 crore in 2020–21.
STATE BUDGETS
- The structure of State Government Accounts is quite similar to that of the Union Government.
- For the States also, the Constitution of India stipulates that no expenditure can be incurred from the Consolidated Fund of a State without the authority of Appropriation Act.
- And in order to obtain this authorization from State Legislature, a statement of anticipated receipts and expenditure for each financial year needs to be laid before the State Legislature.
SIGNIFICANCE OF STATE BUDGETS
- With each passing year, understanding about state government finances is becoming more and more important.
- States now spend one-and-a-half times more than the Union government and, in doing so; they employ five times more people than the Centre.
- Thus, not only do states have a greater role to play in determining India’s GDP than the Centre, they are also the bigger employment generators.
- As such, it is crucial to understand their spending pattern. If, for example, their combined expenditure contracts from one year to the other, then it will bring down India’s GDP.
- Since 2014-15, states have increasingly borrowed money from the market, a trend captured in the fiscal deficit figure.
- In fact, their total borrowing almost rivals the borrowing by the Union government.
- This trend, too, has serious implications on the interest rates charged in the economy, the availability of funds for businesses to invest in new factories, and the ability of the private sector to employ new labour.
- There is another reason why states borrowing more and more should raise concerns especially when they borrow to meet unexpected policy goals such as farm loan waivers.
- Each year’s borrowing (or deficit) adds to the total debt.
- Paying back this debt depends on a state’s ability to raise revenues.
- If a state, or all the states in aggregate, find it difficult to raise revenues, a rising mountain of debt captured in the debt-to-GDP ratio could start a vicious cycle wherein states end up paying more and more towards interest payments instead of spending their revenues on creating new assets that provide better education, health and welfare for their residents.
QUESTION:
what is a state budget? Why do the state budgets matter? Discuss (20 marks)
