UNDERSTANDING BASIC RESOURCE GAP(BRG) of

the STATE GOVERNMENTS in the CONTEXT of

FISCAL FEDRALISM

DR. R.K. PATTNAIK

Professor
Gokhale Institute of Politics and Economics, Pune
 Introduction
• In recent years the mismatch between government expenditure and
receipt has resulted in a persistent and seemingly unsustainable gap in
resources.
• The FRBM Act 2018 has targeted fiscal deficit to GDP ratio at 3 % for the
consolidated position of the state government and debt to GDP ratio at 20
per cent. the
• It may be noted that in the context of fiscal federalism the state
governments have constitutional constraints (Resource inflow to state
government from central government in terms of taxation grants) as per the
finance commission recommendations.
• There are institutional constraints in terms of non-constitutional ( non-
statutory grants ) grants from central government to state government.
Continued……
• Third constraint originate from the financial market in terms of
market borrowings. According to Article 293 of the constitution the
state government cannot borrow from the external market. In
addition the domestic source of borrowing are limited and subject to
approval of central government.
• Fourth constraint is the Ways and Means Advances ( WMA) from the
RBI to state government even though WMA is not a resource large
recourse to WMA and overdraft in the end is a resource.
 Limitations of fiscal deficit
• As explained above the fiscal deficit as defined in the Indian context
Total Expenditure –( Revenue receipts + Non-debt capital receipts+
Disinvestment receipts )
• Fiscal deficit defined in this way doesn’t explicitly present the
constitutional and institutional constraint above and there it needs to
be supplemented with a resource gap concept which recognises and
focuses on more granular aspects of the resource gap of the state
governments.
 Concept of BRG
• The BRG is presented as a concept anchored in the idea of
understanding the resource gap concept.
• BRG recognises the total resource requirement ( TRR ) which is equal
to total expenditure.
• BRG decomposes the resource gap position in three variants namely
BRG1 , BRG2, BRG3.
• BRG1 = TRR – Resources of BRG1( BRGR1 )
• BRG2 = TRR – Resources of BRG2 ( BRGR2)
• BRG3 = TRR-BRG2
 Resources of three variants of BRG
• BRGR1 = Own tax revenue ( OTR) + Own non-tax revenue ( ONTR) +
( Internal debt (ID) – Market borrowing(MB) – WMA) + Recovery of
loans (RoL) + Public Account Receipts ( PAR).
• BRGR2 = BRGR1 + Share in central taxes as per the recommendations
of finance commission ( SCT) + Statutory grants ( SG) as per the
recommendations of finance commission + Grants under provision to
article 275 (1) of the constitution.
• BRGR3 = Non-statutory grants from the centre(NSGFC) + Market
borrowing(MB) + Loans and Advances from centre(LAC) + WMA
 Fiscal dependency and fiscal stress
• The three variants of BRG has an analytical advantage of explicitly
recognising the fiscal dependency of the states and the centre and
fiscal stress of the state government arising out of resources received
from the centre and borrowings raised from the financial market.
• There are two concepts of Fiscal dependency known as
a) Fiscal dependency ratio 1(FDR1)
b) Fiscal dependency ratio 2(FDR2)
• FDR1 = BRG1 / TRR
• FDR2 = BRG2/TRR
 Continued……
• Fiscal stress ratio (FSR) = FDR1 – FDR2
• The FDR1 recognises the extent to which there is an requirement for
resource inflow from Finance Commission( FC) recommendations in
terms of tax and grants plus the requirement from non-statutory
grants, MB and LAC. Thus FDR1 presents the total dependency of the
resource position of the state government.
• The FDR2 recognises the extent to which there is a requirement for
fiscal transfer from the centre in terms of FC recommendations.
• It also recognises the inadequacy of the FC recommendations and
need for Non-statutory Grants , MB and LAC.
Continued……….
• This is a stress factor as there is volatility in the financial market to
raise market borrowing and less scope for non-statutory grants and
LAC which are discretionary in the nature and subject to lower
magnitude because hard budget constraint.
 Analytical advantage of BRG
a. provides a golden rule for fiscal management where total receipts =
total expenditure.
b. compiles various resource gap on the basis of resources mobilized by
the government in the framework of fiscal federalism and
marketization of borrowings by the subnational government
c. recognizes the constitutionally earmarked accounting arrangements
in terms of consolidated fund and public accounts
 Continued………
d. market borrowings and internal debt are taken in gross terms by including
repayments because expenditure on repayments needs to be met from
the resources.
e. unfolds the resource generation through stressed sources which include
market loans, non-statutory grants from federal government and WMA
and Overdraft from RBI for temporary cash shortfalls.
f. helps the subnational governments the resource management in a more
efficient manner by integrating own resources, resources from federal tax
devolution and grants-in aid and fiscal stress of uncertainty associated with
discretionary grants and market borrowings.
g. sensitizes the subnational governments the limitations and moral hazard
associated with WMA and overdrafts