Present State of economy

Context: The pandemic has delivered a “scissor cut” to the government finances.

What is the current scenario?

  • Economic output and government revenues are shrinking.
  • The government has to spend more to safeguard lives and livelihoods.
  • Widening deficit.
  • Most of state’s revenue come from center which changes their debt servicing ability for the worse.

What are the recent issues?

  • Revenue side:
    • In the first half of fiscal the center’s net revenue (tax and non-tax) collection stood at 27.3% of budget for the full fiscal year compared to 41.6% of previous fiscal year.
    • Revenue collections in the first half of the year were down to 32.5% as compared to an average 15% growth over the same period.
  • State’s fiscal issue:
    • Fiscal data for the year is available only for the eleven non special category states.
    • Revenue of these states is down by 21.5%.
    • Adding center’s transfer to the states then the decline in revenue reduces to 16.5%.
    • Shortfall in states’ revenue is much steep than that of center.
    • For the eleven states total expenditure and capital spending have contracted by 1.5% and 23.4 % respectively.
    • Allocation for pension and subsidies down by 10% and 20%.
    • Since health is State subject, state will have to shoulder major part of health expenditure burden on account of the pandemic.
  • Cutting capital expenditure:
    • Both center and state have cut their capital expenditure.
    • This is worrying as states undertake more as they have more than 60% of the overall general government capital expenditure.
    • For instance, in 2019-20, capital expenditure by states stood at rs 4.97 lakh crore down by 20%.
  • Low capacity utilization: for instance, it was 71.9 % in the previous year which is down to 58.6 %.

What are the consequences?

  • Reduces Center’s and states’ ability to invest and lift the economy.
  • Need of more borrowing.
  • Centre’s total expenditure has been declined by 0.6 % which led to 11.6% decline in capital expenditure with revenue expenditure by 1 %.
  • To maintain states ‘spending government has forced them to increase borrowing which has led to increase in market borrowing by 50%.
  • Rising debt level of states. For instance, overall government general debt stood at nine year high.
  • Centre’s debt to GDP is declining.
  • Ratio of interest payment to revenue receipts is also declining which raises question on sustainability of debt.
  • The private sector will remain wary of investing as demand uncertainty continues.
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