Equity, discipline must guide states’ fiscal behaviour
Things have become worse with more states committing themselves to populist schemes with political gains in sight
On Monday, Telangana chief minister Revanth Reddy expressed his government’s inability to pay dearness allowance to government employees because of the precarious fiscal situation of the state. Telangana is not the only state facing a problem in its finances. Things have become worse with more states committing themselves to populist schemes with political gains in sight.
The cash crunch is playing out differently in different states. In some states, governments are diverting funds from more important heads including capital spending to accommodate populist schemes even as the fiscal situation remains under control. In others, both the deficit and the debt are ballooning because of spending beyond means. Because states spend more than the Centre, their fiscal behaviour is extremely important for the economy’s overall fiscal health. What is to be done to get the fiscal position of states in good health?
The most important thing is to accept that there are no one-size-fits-all silver bullets here. Different states have varied fiscal situations and a lot of their fiscal problems, or lack of it, is because of legacy problems. When read with the already brewing differences over fiscal federalism related issues, the problem becomes even more complex. The 16th Finance Commission’s recommendations, once finalised, will likely see more debate on central devolution of taxes and revenue deficit grants given to selected states.
What is needed is a concerted strategy to nudge state finances in the correct direction through an optimum mix of equity and discipline. The former should minimise the pain of correcting legacy issues and the latter should make sure that present and future spending behaviour is responsible. Unless politics adopts this goal, things will not improve on the state finance front. Politics may only be responding to the economic realities facing a large part of the electorate, but the state of the fisc is linked to larger economic realities.
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