The Hindu Business Line : `States must adopt fiscal policy rules'

STATES must adopt fiscal policy rules built under the fiscal responsibility legislation to commit their governments to a deficit and debt reduction path, according to the report of the group on Model Fiscal Responsibility Legislation at State Level.

The group, which was constituted at the twelfth conference of the State Finance Secretaries, held on August 1, 2003, with technical assistance from the RBI, considered the three rules for fiscal responsibility - deficit, debt and borrowings - and deliberated on the choice, coverage and targets of the fiscal indicators.

With regards to State debt, the definition of liabilities has been extended to include not only the total liabilities under the consolidated fund of the State but also all items under the Public Account of the State.

The report observed that fiscal rules should also cover off-budget borrowings as State Governments have a tendency to go for off-budget borrowings, given their need to comply with budgetary targets in terms of the prescribed debt rule.

Borrowings by public sector undertakings and special purpose vehicles and other equivalent instruments including guarantees where the liability for repayment of principal and or interest is on the State Government, would also be treated as borrowings of the Government for computation of total liabilities.

Under the borrowing rule, the group felt that devolvements arising out of State guarantees should be included.

Noting that a number of States are yet to enact the legislation for ceiling on outstanding guarantees, the group decided to incorporate a provision of placing a limit on the annual incremental risk-weighted State Government guarantees in the model Fiscal Responsibility Bill.

On the issue of the level of target variables for the above rules, the group felt that States may fix specific targets, depending upon their underlying fiscal situation and capability to undertake fiscal reforms as judged by individual States.

The group noted that the fiscal performance of the State Governments has been an area of concern in the recent years, as the fiscal stress has seriously constrained the States' ability to discharge their primary responsibility of developing social and economic infrastructure.

Several State Governments have, therefore, made efforts to correct the fiscal imbalances through the medium-term fiscal reform programme memorandum of understandings with the Central Government. Such measures are somewhat discretionary and lack statutory backing, according to the report.

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`States must adopt fiscal policy rules'