From UPSC perspective, the following things are important :
Prelims level : FRBM Act, 2003
Mains level : Fiscal mismanagement by states
- The ongoing dispute between the Centre and the Kerala government regarding fiscal management has sparked debates on financial health, resource allocation, and federal governance.
Financial Mismanagement in Kerala
- Poor Fiscal Health: The Centre contends that Kerala’s fiscal condition is precarious, attributing it to inadequate management of public finances.
- Financial Assistance: Despite substantial financial support provided by the Centre, including additional funds beyond the recommendations of the 15th Finance Commission, Kerala continues to face financial stress.
- Mismanagement: Kerala’s alleged reckless borrowing, financing of unproductive expenditure, and poorly targeted subsidies exacerbate its financial woes, impacting both state and national economies.
What data has to say?
- Rising Liabilities: Kerala’s outstanding liabilities, as a percentage of its Gross State Domestic Product (GSDP), have consistently increased from 31% in 2018-19 to 39% in 2021-22, exceeding the national average.
- Implications of High Liability Ratio: The Centre warns that the elevated outstanding liability ratio results in heightened interest payments, exacerbating fiscal deficits and potentially leading to a debt trap.
- Increased Committed Expenditure: Kerala’s committed expenditure as a percentage of revenue receipts has risen from 74% in 2018-19 to 82.40% in 2021-22, surpassing that of any other state. This trend limits the state’s capacity for productive government spending, negatively impacting long-term growth.
- Federal Structure: Kerala asserts its rights under the federal system to regulate its finances independently, highlighting the Centre’s infringement on its fiscal autonomy.
- Economic Damage: The state argues that the Centre’s actions, such as imposing arbitrary borrowing ceilings, threaten Kerala’s economic stability, jeopardizing its ability to meet developmental goals.
- Court Proceedings: The Attorney General’s submission to the Supreme Court forms part of the legal battle initiated by Kerala against the Centre’s alleged interference in state finances.
- Protection of Federalism: Kerala seeks judicial intervention to safeguard the federal structure, emphasizing the state’s authority over budgetary management and borrowing decisions.
- FRBM Rescue: While the FRBM Act of 2023 primarily applies to the central government, some states have enacted their own FRBM legislation to maintain fiscal discipline at the state level. Kerala doesn’t have its own version yet.
- National Ramifications: The outcome of this dispute holds significance beyond Kerala, impacting the broader framework of fiscal federalism and intergovernmental relations.
- Developmental Concerns: The protracted legal battle could impede Kerala’s developmental agenda and exacerbate financial strains, affecting the welfare of its citizens.
- The Centre-State fiscal dispute underscores the complexities inherent in federal governance and fiscal management.
- As legal proceedings unfold, the resolution of this conflict will shape the contours of intergovernmental relations and define the boundaries of fiscal autonomy within India’s federal structure.
Back2Basics: Fiscal Reduction and Management Act (FRBM Act), 2003
|To ensure fiscal discipline, transparency, and accountability in government spending.
|Fiscal Deficit Targets
|Mandates the government to reduce its fiscal deficit to a specified target over a period of time.
Fiscal deficit target aims to be below 4.5 per cent by 2025-26.
|Elimination of Revenue Deficit
|Requires the government to eliminate its revenue deficit, which is the excess of government’s total expenditure over its total revenue.
|Medium-term Fiscal Strategy
|Mandates the government to formulate and implement a medium-term fiscal strategy outlining plans for reducing fiscal deficit over three years.
|Annual Fiscal Reports
|Requires the government to present an annual fiscal responsibility statement to Parliament, detailing progress in achieving fiscal consolidation targets.
|Penalties for Non-compliance
|Imposes penalties on the government for non-compliance, including fines and disqualification of elected members from holding public office.