Central Government of India Initiatives to the Fiscal Problems of States

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In the year, 2002 a meeting was organized to examine the fiscal condition of the Indian states and suggest remedies for the improvement of their financial condition. The chief ministers of the respective states in India attended the meeting. The Union Minister of Finance & Company Affairs was the Chairperson of the meeting. The meeting was also arranged with a view to scrutinize all the existing feasible formulations.

The Finance Commission of Chhattisgarh also fulfills various other objectives that lead to the development of the state.

Report of High Powered Committee:

The ministers considered the survey report submitted by the High Powered Committee on the present financial scenario prevailing in the states. The report also highlighted certain significant areas that needed special consideration and offered possible solutions to it. The report pointed to the huge amount of revenue deficit and suggested that the provision for bonuses should be stopped for the time being. The category of bonuses should include productivity-linked bonus provided to the employees functioning under the departmental undertakings. In an effort to up grade the ratio between tax and GDP prevailing in the states, the report suggested that the state governments should levy taxes on the service sector and the central government should not declare any new dearness allowance scheme for the employees.

Fiscal Problems in States:
  • Recruitment of excessive staffs in the government organizations other than doctors and teachers
  • Debt Swap unable to fulfill the demands of states
  • Periodical demand for government guarantees by the central financial institutions
  • Over exposure to negotiated loans
  • Diversion of funds
  • Less flexibility with regard to the borrowing instruments
  • Less Open Market Borrowings
  • No special dispensation for Special category States
  • Less flexibility in the overdraft regulation scheme

Fiscal Measures Suggested:

The remedial measures to the above problems include restriction and even total check on recruitment by the Indian government in all the sectors, other than the recruitment of teachers and doctors who are engaged in providing essential services directly affecting the country. The central financial institutions rather than relying on government guarantees should finance the schemes and plans. The acquisition of negotiated loans should be reduced in order to decrease the formation of sizable debt in the states in the coming future. The rate of open market borrowings should be increased and regulations regarding market-borrowing instruments for the states should be reduced. The overdraft regulation scheme should be made more flexible.

Other Fiscal Measures:

The current debt stock levels prevailing in the states and the simultaneous adoption of debt swap scheme should be completely stopped. The respective central ministries under the government of India have been advised to deposit the CSS funds in the Consolidated fund of the states rather than providing the funds to the implementing agencies. The States Level Value Added Tax should be incorporated. The states are required to discuss the issue of increasing the ways and means limit together with the Reserve Bank of India.

For further information on State Finance Commissions, please refer to the following sites