A Times of India report said that senior bureaucrats during a recent meeting with Prime Minister Narendra Modi expressed concern about the state of the financial position of the states. He is said to have said the “freebies” announced by state governments are not sustainable and compared it to the debt repayment problems currently experienced by Sri Lanka and the problems faced by Greece a decade ago.
There are conceptual errors in the reported views of the bureaucrats. Indian states cannot go bust because of constitutional constraints on their borrowing powers.
A federal system, like in India, gives the central government more powers than the state governments. Practically speaking, in India this means that the Government of India (Government of India), exercising the power given by the Constitution, fixes borrowing limits for the states at the beginning of each financial year. Consequently, the discipline imposed on states means that collectively they outperform the Indian government on key indicators such as the ratio of revenue and fiscal deficit to their respective gross state domestic product. Therefore, the pre-pandemic factual position in India is that states had better indicators of fiscal health.
Also read: Free facilities are not sustainable, states may collapse, Secretaries meet PM
So, how are ‘free gifts’ paid for? By reallocating expenditure as per the political priority of the present government. If the farmers are to be given free electricity under the election promise of the coming government, then some more expenses will have to be reduced. At most, this reallocation may give rise to the question of whether this is the best way to allocate resources to meet the stated objectives of the incoming government. However, it is ideologically wrong to link this to fiscal stability and the fear of being ‘bust’, which can happen only if borrowings are volatile. The inquiry on that situation is the superior power given to the Government of India.
In the case of Sri Lanka, it is the central government of the country that chose to borrow in foreign currency. He is now struggling to repay himself.
To help cause a more informed discussion between our bureaucrats, perhaps the Reserve Bank of India, which manages the borrowings of both the Government of India and the states, could organize online tutorials on the subject. This will improve policies.
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