2 States breach 3% fiscal deficit target

‘We can only advise them, caution them, but can do nothing to stop them,’ RBI tells analysts

While the Reserve Bank of India (RBI) had cautioned seven States not to breach the 3% fiscal deficit target, two States have already breached that threshold, RBI officials told analysts and researchers in a teleconference post the monetary policy review on Wednesday.

Several analysts and researchers who attended the teleconference told The Hindu that the central bank officials said they do not have any constitutional backing to stop States from breaching the 3% fiscal deficit mark.

Patel attends

RBI Governor Urjit Patel along with the deputy governors interacted with analysts and researchers during the teleconference.

“We can only advise them, caution them, but can do nothing to stop them,” said an analyst quoting RBI officials who attended the call. RBI had asked seven States not to breach the mark, excluding expenditure for UDAY scheme.

While the Fiscal Responsibility Budget Management Act prescribes a fiscal deficit threshold of 3% of gross state domestic product, States can take permission from the Centre for exceeding the 3% mark.

Farm loan waiver

Farm loan waiver scheme, implemented by some States and contemplated by others, have compounded the problem.

“The risk of fiscal slippages, which, by and large, can entail inflationary spillovers, has risen with the announcements of large farm loan waivers,” RBI had said in the second bimonthly monetary policy review of 2017-18.

In its report on State finances released last month, the central bank noted the consolidated finances of States has deteriorated in recent years, with the gross fiscal deficit to GDP ratio averaging around 2.5% in the last five years (2011-12 to 2015- 16) as compared with 2.1% during the previous quinquennium.

The report said the GFD-GDP ratio in 2015-16 (RE) breached the 3% ceiling of fiscal prudence for the first time since 2004-05. Information on 25 States indicates that the improvement in fiscal metrics budgeted by states for 2016-17 may not materialise.

“It is expected that states will take necessary steps to consolidate their fiscal position,” according to the report.

Resource crunch

The central bank observed that State governments face severe resource constraints as their non-debt receipts were often insufficient for fulfilling their developmental obligations.

As a result, states resort to market borrowings to bridge the resource gap. “Over a period of time, such borrowings may result in the accumulation of debt liabilities which, if unchecked, could pose major challenges for macroeconomic and financial stability,” according to the report.

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