RBI latest report: Indian Economy, under many circumstances, has proved to be resilient and hopeful. Today it is facing yet another challenge. Along with the pandemic disrupted supply chains and trade, Russia-Ukraine war is also hurting economies globally. The world is moving towards recession and inflation. Still, the Indian economy is growing at a faster rate than most other economies. But it looks like domestic governance challenges are more problematic than the international trends.
RBI takes on freebies
On Thursday, RBI presented a latest report raising concerns over the rising subsidies announced by the states. According to the RBI latest report, the state expenditures on subsidies have grown by 12.9% in FY20-21 and 11.2% in FY21-22. With respect to the revenue expenditure, the share of subsidies has grown from 7.8% in FY19-20 to 8.2% in FY21-22.
In its Financial Stability Report, RBI said that “The rising expenditure on non-merit subsidies may raise the share of committed expenditure in states’ constraining the fiscal space available for developmental and capital spending.”
RBI also quoted 15th Finance Commission report which says “Notwithstanding the gains from fiscal consolidation, there are concerns about rising subsidies announced by many states.”
India is weathering the storm
According to World Bank, after strong economic conditions in 2021, the world economy is facing an economic slowdown due to fresh Covid threats, inflation and debt and income inequality. World Bank has estimated global growth deceleration to 4.1% in 2022 and 3.2% in 2023.
India too is witnessing that slowdown. India is expected to grow at 6.9 per cent, which was 8.7 per cent in 2021. However, if we look comparatively, India is in a much better position than most other economies. In RBI latest report ‘Navigating the storm’ World Bank denies much impact of global turmoil on Indian economy. This is because of large domestic market which produces a robust demand thereby, isolating Indian economy from global spill overs up to certain extent.
India’s position is also better because of improved external conditions. The fiscal deficit has continuously decreased in previous years. During 2021, fiscal deficit increased to 9.3%. It was basically due to the much needed welfare initiatives taken by government during Covid era.
But later, the government took steps to cope with the deficit and in 2022 it reduced to 6.9%. It is expected to be reduced to 6.4% in 2023 and ultimately to 4.5% in 2025-26. But it is not only the central government’s responsibility when it comes to fiscal robustness. State governments have a role to play too.
RBI latest report: States are splurging
In the Indian decentralised governance model, states get fund allocated and tax devolution on the recommendation of the Finance commission. However, in order to appease the citizens and for electoral gains, political parties persue freebie tactics. It is generally seen that, instead of introducing reforms and development policy, many state governments are busy in freebie politics.
These short-term benefits to people help them to be in the government for a long time. However, its long-term implications are drastic. NK Singh, the chairman of the 15th Finance Commission, says that “The growing culture of doling out subsidies ahead of elections has lately been a topic of public discussion.”
States like Punjab, Andhra Pradesh and Madhya Pradesh are the premier freebie announcers. It must be noted that all forms of subsidies are not bad. Subsidies on education and homes are known as merit-based subsidies. These subsidies have a positive effect on society. But promoting non-merit subsidies pressurizes the economy as well as hinders the capability of the work force.
It is the time for political parties to wake up
Recently, Prime Minister as well as Supreme Court have criticized such practices. The political parties must understand its economic impacts on the Indian economy. The Central Government has introduced many policies that have helped the economy to stand firmly against global challenges. This includes the announcement of ‘Make in India’, PLI scheme, etc. Apart from all these initiatives, government is also promoting welfare policies within the fiscal constraints allowed by the market
While the Central government is doing its part in strengthening the Indian economy, it is the duty of the state governments to support those initiatives. And if state governments fail to do so, they will suffer fiscal collapse.
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