PUBLIC FINANCE SYSTEM OVERVIEW

 

For: Preliminary & Mains
Topics covered: Report Highlights, GST, FRBM Act

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News Flash

S&P Global Ratings credit analyst YeeFarn Phua in the report titled “Public Finance System Overview: Indian States” noted that, Goods and Services Tax (GST) regime in India is not likely to reduce the deficits of state governments significantly, amid large and growing expenditure mandates for the social sector as well as capital spending.

 

Report’s Findings

• According to S&P Global Ratings the institutional framework for Indian states is evolving, but there is structural deficits due to persistent revenue expenditure mismatch.
• The report also noted that the passage of the GST bill in 2017 is a major overhaul of tax structure and will help to widen the tax base and improve revenues of state governments.
• States will continue to run large deficits because a significant part of this imbalance is from the expenditure side.
• States are unable to cut expenditures because of large and growing expenditure mandates for the social sector as well as capital spending. Therefore, the revenue-expenditure gap will remain large.
• Also, policy implementation remains sub-par in India.
• Another significant development in recent years has been the adoption of an amended Fiscal Responsibility Management (FRBM) Act, which forms the fiscal framework, in March 2018.
• Under the amended FRBM Act, the government will target a debt-to-GDP ratio of 60 per cent with the split being 40:20 for central government and states.
• Further, the government will use fiscal deficit as the key operational target.
• FRBM committee lacks the authority to mandate its core recommendations.

 

Goods & Service Tax

• GST is one indirect tax for the entire country. It is levied on the supply of goods and services.
• The Goods and Service Tax Act was passed in the Parliament in March 2017 and came into effect on 1st July 2017.

 

FRBM Act

The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 which set targets for the government to reduce fiscal deficits.

• It aims at bringing financial discipline on government expenditure.
• Aimed primarily to bring a check on revenue deficit, the act strives to improve the overall management of public finance by controlling unchecked borrowings and imparting financial discipline.

 

Source: The Hindu Businessline

 

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