Question Bank

April 28, 2017 @ 10:00 am
Question Bank

28th APRIL 2017


(2 Questions)

Answer questions in NOT MORE than 200 words each. Content of the answer is more important than its length.

Links are provided for reference. You can also use the Internet fruitfully to further enhance and strengthen your answers.


1.     The challenge of the States in achieving a debt to GDP ratio ceiling of 20% by 2023, as recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee report recently, threatens overall fiscal responsibility targets. Discuss the way ahead to achieve this.

Fiscal deficit target:

  • It is no mean achievement that the daunting fiscal deficit target of 3.5% of GDP for the past year was met.
  • Beyond the 3.2% fiscal deficit target for the current year, the government has accepted a 3% target thereafter.
  • The Fiscal Responsibility and Budget Management (FRBM) Review Committee report, now in the public domain, has preferred a debt to GDP ratio of 60% for the general government by 2023comprising 40% for the Central government and 20% for the State governments.
  • Given the recent track record, there is a reasonable probability of the Central government achieving the 40% debt to GDP ratio. The focus now is on the States.

Drag factors for States:

1.     A key issue in assessing long-run fiscal sustainability is the future trend of the differential between the interest paid to service government debt (r) and the growth rate of the economy (g).

§  For highly indebted countries, an increase in this differential of a couple of percentage points, if sustained, could lead to a change from a declining to an explosive path for the debt-to-GDP ratio.” A negative interest rate-growth differential (i.e. r-g, growth rate greater than the interest rate) causes debt to GDP to decline over time.

§  However, the advantages on account of a favourable r-g depend primarily on the level of debt stock. In this context, the Union government, which has larger domestic liabilities of 49.23% of GDP as compared to that of the States (21% of GDP), benefits more due to a negative interest rate-growth differential.

§  The combined debt dynamics necessitate States to run successively lower primary and fiscal deficits just to maintain their combined debt to GDP ratio at the current level.

§  This is a classic case of the Red Queen in Lewis Carroll’s Through the Looking-Glass saying, “If you want to get somewhere else, you must run at least twice as fast as that!”

2.     Second, the role of exogenous factors in fiscal corrections of the States.

§  Till FY13, fiscal conduct of the States was exemplary, strictly adhering to and even outperforming the targets of the Fiscal Responsibility Legislations (FRLs).

§  No doubt positive externalities facilitated this outcome.

§  Consolidation of Central loans and debt waiver to States based on their fiscal performance effectively reduced their interest payments to about 0.9% of Gross State Domestic Product (GSDP).

§  Given the debt-restructuring scheme of the Twelfth Finance Commission (FC), Central relief packages and positive economic scenario, it is difficult to differentiate the fiscal correction due to improved management and fiscal discipline.

3.     Third, the recent marked deterioration in fiscal health of the States.

§  The Fourteenth FC enhanced the borrowing limits up to 0.5% of GSDP for the States. This was conditional on debt to GSDP ratio being less than or equal to 25% and/or interest payments being less than or equal to 10% of the revenue receipts in the preceding year. The fact that only six States in FY17 were eligible for enhanced borrowing is indicative of States’ decaying fiscal prudence.

§  The recent spate of farm loan waivers is episodic and symptomatic of deteriorating State finances.

The way forward:

  • The prudent use of powers defined in the Constitution of India under Clause (3) of Article 293 is the way ahead.

§  This makes it mandatory for a State to take the Central government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.

§  Recently, the Union Cabinet has permitted State government entities to directly borrow from bilateral partners for vital infrastructure projects. Incentivising prudent fiscal management is a welcome initiative.

§  Fiscally healthy States should be enabled to attract higher investments at lower costs.

  • Ushering in transparent accounting practices.

§  It is being increasingly acknowledged that the current stock of State debt at 21% of GDP could be underestimated owing to fallacious budgetary practices and operational intricacies.

§  Off-budget expenditures through State Public Sector Undertakings’ (PSUs) borrowings and explicit guarantees offered by the States do not form a part of State government liabilities.

§  Private researchers and public auditors alike have been pointing out the growing trend of off-budget public spending and mis-categorisation of budget data.

§  The Comptroller and Auditor General of India (CAG), while appraising States’ finances, has repeatedly censured such practices.

§  The Fourteenth Finance Commission’s (FFC) recommendation of adopting “a template for collating, analysing and annually reporting the total extended public debt in their respective budgets as a supplement to the budget document” must be implemented.

  • Three, emphasising quality of expenditure.

§  A recent HSBC report notes that “quality of state spending (proxied by the ratio of capital to current spending) has been gradually worsening over the past few years”.

§  The share of States’ revenue expenditure in total expenditure has remained around 80% and States’ non-developmental expenditure has risen by over 50% from FY2013 to FY2016.

§  The RBI’s latest assessment of State Budgets with the theme, ‘Quality of Sub-national Public Expenditure’, raises the concerns aboutdominance of revenue expenditure in the States.

  • Four, encapsulating ‘Fiscal Discipline’ in determining inter se tax shares of different States.

§  Fiscal discipline as a criterion for tax devolution was used by Eleventh, Twelfth and Thirteenth Finance Commissions for incentivising the States in prudent management of its finances.

§  However, the FFC dropped this indicator and accommodated ‘Population (2011)’ and ‘Forest Cover’ in its devolution formula.

§  Given the deteriorating condition of State finances, the Fifteenth Finance Commission could consider restoring fiscal discipline as a determinant for horizontal devolution of funds.


2. What is pseudosecularism?

Left view:

  • The term ‘pseudo-secular’ is propounded by the ideologues of Hindu communalism to delegitimise and deny the genuineness of secularism.
  • They claim that secular forces indulge in minority appeasement to create vote banks, and are therefore not genuine in their secularism.
  • It is the staunch secular nationalism of the Indian people which has forced communalists to pretend to be secular and nationalist, thus making them the true claimants to the terms pseudo-secularist and pseudo-nationalist.

Right view:

  • Derived from the Latin ‘saeculum’, which meant ‘the temporal world’, the term ‘secular’ was used in mid-19th century Western Europe to refer to a specific policy of separating Church from State.
  • The Church represented the highest authority over the spiritual sphere and the State, the highest authority over temporal matters.
  • The word Hindu is more geographic than religious. It originally denoted the land on the other side of the river Sindhu. The inhabitants of the region were called Hindus by successive invaders, and the dominant religious strain was codified as an ‘ism’ by the British more for political and administrative reasons than theological.
  • It is not merely polytheistic; it is plural in terms of beliefs, traditions and practices. It is otherworldly and its message is meant for the entire humankind. Calling India secular is to question the very essence of the Sanatana Dharma, commonly translated as ‘eternal path’ or ‘eternal way.’
  • I see secularism more as a ploy to deny an alternative perspective to emerge that would provide a framework drawn on our historical experiences, philosophical traditions, and spirituality to contest the hegemonic secularist discourse and the dominant modes of knowledge.
  • The pseudo-secularists’ attempt to posit Hinduism and secularism as binary opposites, for instance, betrays their ignorance or lack of interest or simply their colonised mindset.

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