Fiscal Deficit Current Affairs - 2020

GoI releases Rs 6,195 crores of funds to 14 states

On May 11, 2020, the Government of India released Rs 6,195 crores to 14 states. This is the second equated monthly installment of Post Devolution Revenue Deficit.

Highlights

The grant allocated to the states will act as additional source of income to the states. The grant was recommended by the 15th Finance Commission. The Central Government under the grant allocated Rs 1,276 crores to Kerala, Rs 952 crores to Himachal Pradesh, Rs 638 crores to Punjab, Rs 631 crores to Assam, Rs 491 crore to Andhra Pradesh, Rs 417 crore to West Bengal and Rs 423 crore to Uttarakhand.

Significance

The grant will help the states make preventive and mitigation measures to contain COVID-19. The funds will be used for sample collection, quarantine facility, screening and setting up of additional testing laboratories. The funds will also be used for purchase of PPE (Personal Protection Equipment), thermal scanners, air purifiers, ventilators, consumables in government hospitals.

Revenue Deficit

The revenue deficit covers the gap between revenue and expenditure of a state. According to Fiscal Responsibility and Budget Management Act, 2003, the states should maintain revenue deficit of zero. According to the Constitution of India, state cannot raise a loan without consent of the Centre. This is why, the Kerala Government in 2019 couldn’t claim the flood relief grants from Saudi Arabia. The centre did not permit.

Finance Commission: States shall use FRBM clause to fight COVID-19

On April 24, 2020, the Finance Commission has advised the state governments to use the clauses of FRBM (Fiscal Responsibility) act in order to raise additional resources to fight against COVID-19.

Centre and State FRBM

The states have their own FRBM act. The main similarities between the centre and state FRBM is that the limit of fiscal deficit is 3% and the governments can raise the deficit up to 50 basis points. The State governments have been advised to use this clause. With this permissible amount of fiscal deficit, the state governments will have funds in hand.

Issues identified by the Finance Commission

The Finance Commission has identified the following possible issues during the meeting with its advisory council

  • The small-scale industries were cash starved even before COVID-19 crisis. Therefore, the commission suggests a support mechanism to help solve cash flow problems.
  • The Commission also suggests measures to avoid bankruptcies. It suggests partial loan guarantee.
  • The pace of revival in different state may vary differently. Therefore, an adequate provision to help governments manage cash flows is important.