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Rethinking fiscal rules has often been a central theme in the debate over cooperative federalismin India. The Centre has recently determined that contingent liabilities or off-budget borrowings will be included in estimating the Net Borrowing Ceiling (NBC)of the states.This has considerably reduced the fiscal space of thestate governments and has turned into a big issue in the Centre-State relations.Many states have been vocally pointing out how this decision has reduced their fiscal space amidst macroeconomic uncertainties and increased volatility in intergovernmentalfiscal transfers. 
Over the years, the states have innovated ways to expand fiscal spaces, often going beyond the purview/ limits of the fiscal rules. For instance, Kerala has created the Kerala Infrastructure Investment Fund Board to enable capital and social infrastructure projects to supporteconomic growth and maintain high human capital formation. To meet the challenges related to maintaining robust growth, Telangana has innovated a debt maturity strategy by buying more long-term bonds to postpone the refinancing risks.
The finance minister of Kerala recently highlighted that the changed approach by the central government in calculating the Net borrowing ceiling (NBC) incorporating the off-budget borrowing will affect the fiscal space of the state in planning the economic growth path and economic development of the state.
If revenue receipts can finance the entire revenue expenditure, the revenue deficit remains zero and whatever State borrows can go for capital expenditure. Though substantial tax rate revisions have been announced in the 2023-24 budget of Kerala, tax financing alone cannot cover the entire revenue expenditure of the state.Hence, the revenue deficit is not zero in the state. The revenue deficit to GSDP (Gross State Domestic Product) ratio however has declined from 2.6% in 2020-21 (accounts) to 2.1% (2023-24 B.E.). Further, a reduction in revenue deficits might be possible only through revenue expenditure compression. In the post-pandemicfiscal strategy, revenue expenditure compression has detrimental effects in economic growth and human development.
Fiscal rules and the way ahead 
To put the matter in perspective, we need to know the existing fiscal rules, which stipulate a threshold ratio or value for debt and deficits. In the United States, it is stipulated as an ‘absolute’debt ceiling, while in Europe and India, the deficit is stipulated as a percentage of the GDP. Globally, there is a rethinking about these fiscal rules against the backdrop of geopolitical risks and uncertainties. 
In India, recently fiscal rules are articulated in an ad hoc andarbitrary manner without any change in legislation. For instance, in the post-pandemic fiscal consolidation roadmap, the deficit is visualised as 4.5% of the GDP instead of the stipulated 3% as per the FRBM (Fiscal Responsibility and Budget Management Act).This articulation indeed has helped the government to maintain an accommodative fiscal policy stance for the economic growth recovery process. The fiscal deficit of the central government has mounted to over 9% of theGDP when the pandemic hit. The government has consistently reduced the deficit in the post-pandemic years. 
At the sub-national government levels, in the post-pandemic fiscal strategy, the states of India are instructed to maintain the fiscal deficit at the level of 3.5%GSDP, with 0.5%extra borrowing powers tied to mandatory power sector reforms. The fiscal rules threshold of zero revenue deficit is considered a'golden rule' as it translates that the entire revenue spending needs to be financed through revenue receipts. This implies that the borrowing is entirely used for capital spending. However, empirical analysis shows that the states have overthe years over-adjusted to fiscal rules by maintaining a deficit to GDP at 3% at the cost of capital spending. This definitely has severe repercussions on the economic growth process.
Against this backdrop, a few states have started innovating fiscal space through “off-budgetborrowings”. For instance, the borrowings through public sector entities were not calculated as part of the fiscal deficit. To capture the entire borrowing requirements, the PSBR (Public Sector Borrowing Requirement) is a better measure. The PSBR measures the“general government” deficit plus borrowings of public sector entities. However, there is no continuous time series data on the PSBR in India. 
Budget transparency and accountability 
The central government argues that fiscal profligacy and freebie spree need to be contained. Theinter-generational inequities of high debt burden is highlighted astoday's debt is tomorrow's taxes and this put the future generationsin perpetual debt. However, whatneeds to be takeninto account is that the high capital and social infrastructure spending can create inter-generational 'equities'.
Budget transparency is an important aspect of fiscal rules. The opaqueness of 'off-budgetborrowings' by the Centre and the states is an issue of concern. The Union Budget documents have revealed the off-budget borrowings in an annexure,not as part of the fiscal deficit. However, asking the states to maintain a fiscal deficit to GSDP ratio at3.5%, linking the extra borrowing space of 0.5% to power sector reforms and counting the contingent liabilities as part of the Net Borrowing Ceiling may not leave the state finance ministers with the fiscal space they require to operate. The financial and operational efficiency parameters of theDISCOMs – including the AT&C (AggregateTechnical and Commercial) losses and ACS-ARR gap and tariff revisions – are in doldrums across the states. 
The political economy 
The plausible way out could be introducing the PSBR in India, although data challenges appear to be huge. Yet another plausibility is the upward revision in fiscal rules threshold of the states from the stipulated 3.5% if the centre is keen on budget transparency by incorporating off-budget borrowings into fiscal space calculations. However, the political economy of this issue is compelling and the ultimate solution needs to be arrived at through a consultative process with state governments rather than instructing the new fiscal rules as a top-down technocratic exercise driven by deficit debt thresholds.
This article appeared first in Deccan Herald, on June 10th 2023.
Lekha Chakraborty is Professor, NIPFP and Research Associate of Levy Economics Institute of Bard College, New York and Member, Governing Board of International Institute of Public Finance (IIPF) Munich.
The views expressed in the post are those of the authors only. No responsibility for them should be attributed to NIPFP.


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