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3) Increasing fiscal deficit of states is a cause of worry and there is a considerable need to focus on state government finances. Analyze. (250 words)

Topic– Indian economy – issues

3) Increasing fiscal deficit of states is a cause of worry and there is a considerable need to focus on state government finances. Analyze. (250 words)

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Why this question

The article discusses the increasing fiscal deficit of the states, the reasons for the same and the issues that might arise out of unchecked expenditure. Economic Survey last year had also discussed the need for keeping a tab on state government finances. This question expects you to prepare an important macroeconomic issue with wider ramifications.

Key demand of the question

The question expects us to analyze the situation of the states with respect to their fiscal deficit, the reasons for the worsening performance of the states over the years, the need to refocus on state government finances as highlighted in the article as well as by NK Singh committee. Finally, we need to suggest a way forward.

Directive word

Analyze – When asked to analyze, you  have to examine methodically the structure or nature of the topic by separating it into component parts and present them as a whole in a summary.

Structure of the answer

Introduction – Discuss the recommendation of FRBM Act wet state finances and why the issue of state finances has been in the news off late.

Body

  • Discuss the status quo of states wrt their fiscal performance – fiscal deficit has widened from 18% in FY12 to 44% in FY18. Consolidated state government expenditure is around 1.4 times the size of the Central government expenditure.
  • Discuss the aims of FRBM Act and NK Singh committee wrt state finances
  • Examine the causes behind poor performance of state wrt their finances – GST, share of state’s own revenue, rising expenditure commitment etc
  • Discuss the need to refocus on state finances to ensure that the macroeconomic stability is not disturbed

Conclusion – emphasize on the need to refocus on state finances and discuss the way forward.