Senior IAS Officers Need Basic Economic Concepts Tutorial
A Times of India report said senior officials during a recent meeting with Prime Minister Narendra Modi expressed concern over the state of the states’ fiscal situation. They reportedly said the “gifts” announced by state governments are unsustainable and drew a comparison to the debt repayment problems now facing Sri Lanka and a decade ago by Greece.
There are conceptual errors in the reported opinions of bureaucrats. Indian states cannot go bankrupt due to constitutional constraints on their borrowing powers.
A federal system, like India’s, gives the central government more power than the state governments. In practical terms, in India, this means that the Government of India (GoI), exercising the power conferred by the Constitution, sets the borrowing limits for the states at the beginning of each financial year. Therefore, the discipline imposed on the states means that collectively they are doing better than the Indian government on key indicators such as the proportion of revenue and budget deficits to their respective gross domestic product. Therefore, the pre-pandemic factual position in India is that states had better fiscal health indicators.
Also read: Giveaways aren’t viable, states can go bankrupt, secretaries say as PM meets
So how are “free” paid? By reallocating spending according to the political priority of the government in place. If free power is to be given to farmers as part of an election promise from an incoming government, then certain other expenditures must be cut. At best, this reallocation may raise questions about whether this is the best way to allocate resources to achieve the stated goals of a new government. However, it is conceptually wrong to link it to fiscal sustainability and fear of going bankrupt, which can only happen if borrowing is unsustainable. Control of this situation is a superior power given to the GoI.
In the case of Sri Lanka, it was the country’s central government that chose to borrow in foreign currency. He is now struggling to repay that.
To help the cause of more informed discussions among our bureaucrats, perhaps the Reserve Bank of India, which handles GoI and state borrowings, can conduct online tutorials on the subject. This will lead to better policies.
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