Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

RBI flags States’ fiscal stress

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: FRBM targets

Mains level: The continuous cycle of Farm loan waivers and its detrimental effect on economy


Risk of higher expenditure

  1. The Reserve Bank of India (RBI) has pointed to the fiscal stress that States are facing due to several factors including farm loan waivers
  2. In a report ‘State Finances: A Study of Budgets of 2017-18 and 2018-19,’ the central bank noted that States’ consolidated gross fiscal deficit (GFD) overshot the budget estimates in 2017-18 due to shortfalls in own tax revenues and higher revenue expenditure

What could this mean?

  1. Since the combined GFP to GDP was at 6.4% as compared with the Fiscal Responsibility and Budget Management Committee’s (FRBM) medium-term target of 5%, there is a risk that private investment gets crowded out of the finite pool of financial resources
  2. Risks are also likely to emanate from possible higher pre-election expenditure in more than 10 States and implementation of the balance pay commission awards
  3. With States continuing announcements and roll-out of farm loan waivers, the budgeted GFD could be at risk, and additional borrowing requirement could produce a concomitant impact on the already elevated borrowing yields

Effect of farm loan waivers

  1. These have a dampening impact on rural credit institutions
  2. Waivers impact credit discipline
  3. They vitiate credit culture and dis-incentivise borrowers to repay loans, thus engendering moral hazard
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