Why the fiscal mess?

Context: The decline in the fiscal parameters of the center due to the increased transfers to the states in recent years essentially restricted the Centre’s relief efforts during the pandemic. The government must consider a fresh approach to reviving growth

Creation of Fiscal mess:

• The greater share of revenue to the states:

• Increase in states’ share in Centre’s gross tax revenue: from 28% to 35% between 2013 and 2017
• Centre’s transfer as the share of states’ revenue: shot up from 45% (2013-14) to 62%(2019-20)
• Centre’s net tax revenue: increased only by 102% while tax transfers to the states gone up by 168%.
• States’ total revenue: increased by 132% as compared to 93 % for the center between 2013-2019.
• States-to-Centre ratio: of total government receipts have pivoted from 56:44 to 65:35.
• For every rupee that Centre now spends, states spend almost two.

• Crazy Budgeting by Centre:

• Ignored the revenue slowdown: already visible in 2018-19 which resulted in a shortfall of over 20%.
• Fiscal deficit which was 48% of total revenue in 2013-14, has been brought down to 37% by 2016-17 but increased to 53% for 2019-20.

• Emerging downward pattern: all ratios like tax-to-GDP ratios improved after 2013-14 but began their downfall after 2017

• The indirect tax-to-GDP ratio dropped from 5.6% to 4.9%.
• Failure of GST in arresting the decline in tax-to-GDP has been complemented with growth slowdown.

Darkened future:

• As the expenditure increases to boost the economy, the fiscal deficit could climb from 53% to 65% of the total Central revenue last year.

• Every two out of five rupees that the government spends would then be borrowed.

Way Forward: 

• The current crisis has shifted focus away from fiscal prudence. A fresh approach to reviving growth, re-visiting the Centre-state fiscal balance, devising a re-imagined GST 2.0, and accepting a feasible social safety net is the need of the hour.