The Reserve Bank of India recently brought out the ‘Report on State Finances’.
What did the report say?
RBI has warned that many States may face fiscal risks this year.
States budgeted a gross fiscal deficit (GFD) to gross domestic product (GDP) ratio of 2.7% in 2017-18.
The GFD-GDP ratio crossed the threshold for the third consecutive year.
For 2018-19, the states have budgeted for a consolidated GFD of 2.6% of GDP.
Outstanding liabilities of States grew at double digits for all years barring 2014-15.
Maharashtra, Uttar Pradesh, TN and WB had the largest shares of market borrowings in 2017-18.
Among the Special Category States (SCSs), Assam, Himachal Pradesh, J&K and Uttarakhand were the major borrowers.
The growth of gross market borrowings of SCSs during 2017-18 outstripped that of non-special category States by a wide margin of 7%.
What are the causes?
Fiscal deficit of states is essentially due to shortfalls in own tax revenues and higher revenue expenditure.
State budgets have been under pressure due to:
committed expenditures on account of pay commission awards
expenditures from State-specific schemes like farm-loan waivers
issuance of UDAY (Ujwal Discom Assurance Yojana) bonds in 2015-16 and 2016-17
In the aftermath of the 2008 global financial crisis, States borrowed big from markets.
It was mainly due to the additional fiscal space given to states as part of stimulus measures.
The 10-year bonds had now reached maturity.
This has increased the redemption pressures on the States that issued them.
This would imply that the borrowings of States are expected to rise.
Also, a substantial portion of the outstanding State Development Loans (SDLs) will mature in the next 3 years.
This would keep the redemption pressure high in the near future.
What are the suggestions?
The resultant slippage in fiscal deficit target could probably reflect in higher borrowing requirements for 2018-19.
This, in turn, could be an impact on borrowing costs.
RBI has thus suggested reducing leakages and enhancing efficiency of the public distribution system.
This would rationalise the expenditure of the states.
Also, improved public financial management practices may be necessary to rebuild the fiscal space.
It is essential to undertake fiscal reforms, so as to lower borrowings.
Otherwise, borrowings could add to the concerns on debt sustainability.
There is also a need for larger and faster corrections in primary deficits.
These are essential to adhere to the revised Fiscal Responsibility and Budget Management (FRBM) target.
It stipulates a target of 20% for the State-level debt to GDP ratios by 2024-25.
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The Companies Act, 2013- What & Why
GS Paper-2, Government Policies, and Intervention
Why in news?
The Ministry of Corporate Affairs (MCA) has constituted a committee to review the Companies Act, 2013.
What is the Companies Act, 2013?
The Companies Act, 2013 entailed the first massive overhaul of India’s legal regime to govern businesses.
The Act consolidates and amends the law relating to companies.
The 2013 Act imposes stiff penalties and, in some cases, prison terms as well, for directors and key management personnel.
What has the committee mandated?
The committee is mandated to review the overly harsh provisions of the Companies Act.
It has been tasked with checking if certain offences under the Act can be ‘de-criminalised’.
It will review if any of the violations that can attract imprisonment may instead be punished with monetary fines.
It will review the provisions relating to non-compoundable offences which are grave and criminal in nature.
Also, it will recommend if any such provisions need to be re-categorised as compoundable offence.
It is also mandated to lay down the framework of an in-house adjudicatory mechanism.
This will allow penalties to be levied for minor violations, in an automated manner, with minimal discretion available to officials.
What is the rationale behind the Act?
The high-pitched anti-corruption discourse of the time led to harsh penalties and prison terms in the 2013 law.
Several cases of crony capitalism, massive corporate frauds have tainted the credibility of corporate India’s standards.
But the harsh provisions have had an impact on investor sentiment and the ease of doing business.
Hence a review of the Companies Act is seen as a means to address the above concerns and revive the economy.
The changes in the regulatory regime are expected to allow trial courts to rationalise their time.
Courts could pay more attention to serious offences rather than get overloaded with cases of minor violations.