Heavy debt burdens are the real issues in our debate over freebies

Source: The post is based on an article “Heavy debt burdens are the real issues in our debate over freebies” published in The Live Mint on 5^th September 2022.

Syllabus: GS 3 – Indian Economy

News: This article discusses the measures that can be adopted to achieve the fiscal deficit target.

The Centre never logged a fiscal deficit ratio of less than 3% after 2007-08 and all states combined had logged less than 3% after 2004-05.

This is because, the Fiscal Responsibility and Budget Management (FRBM) rules cap the deficit at 3% of gross state domestic product. It requires special permission to go beyond this level.

What are the rules needed to be adopted to check the fiscal deficit?

There are rules needed to cap the deficit as well as ensure transparency.

First, we need a rule that is binding on both the Centre and states. The Reserve Bank of India can be made the care taker to ensure that access to the debt market for states and center closes beyond a prescribed level.

Second, Contingent liabilities must be counted as a part of the fiscal deficit—both of the Centre and states. This will deliver transparency and ensure that debt doesn’t build up outside budgets.

Third, guarantees by the government to any publicly-owned entity should be banned. Because, it creates an environment of not taking responsibility for performance and the entity will be forced to operate on commercial terms. If guarantees are gone, they will have to borrow money from the financial system based on their strength and performance.

Fourth, to ensure a certain amount is spent as a capital expenditure a certain portion of the borrowing should be set aside by a rule. This will ensure that the government is building infrastructure. The Finance Commission must strongly mandate the level of capex at 20% or 25%.