Challenges of sub-national fiscal correction


  • Recent concerns over excessive doling out of freebies by States are often interpreted as intrusion into the federal powers of the States. States push back on this issue on the grounds of welfare provisioning and protection of the vulnerable sections of the population.
  • The Central government’s alarm has been on the mounting debt burden and the deteriorating fiscal situation in some States. As both the Union government and States are expected to work closely in a co-operative federal structure, frictions arising out of these exchanges might have repercussions on both resource sharing and expenditure prioritisation. Hence, it is important that the Centre and States are on the same page on these issues.

Issues in India’s fiscal federalism:

In recent times, three issues have emerged as major discussion points in India’s fiscal federalism, leading to back-and-forth exchanges between the Centre and States.

  1. Issues related to Goods and Services Tax (GST) such as the rate structure, inclusion and exclusion of commodities, revenue sharing from GST and associated compensation.
  2. State-level expenditure patterns especially related to the welfare schemes of States.
  3. Implementation of central schemes.

Issues related to GST have a forum for discussions as they are usually the agenda for GST council meetings.


GST Council:

  • Goods and Services Tax (GST) regime came into force after the Constitutional (122nd Amendment) Act of 2016. GST gives effect to ‘One nation, one indirect tax’. It replaced multiple other indirect taxes being levied on goods and services like sales tax, VAT etc.
  • To take policy decisions on GST like rate of taxation, the GST Council was set up through the same amendment act. It is a joint forum of the Centre and the states.


  1. Union Finance Minister (chairperson)
  2. Union Minister of State (Finance) from the Centre.
  3. Each state can nominate a minister in-charge of finance or taxation or any other minister as a member.


  • The Council under Article 279 will “make recommendations to the Union and the states on important issues related to GST, like the goods and services that may be subjected or exempted from GST, model GST Laws”.
  • It also decides on various rate slabs of GST.


However, other two matters are generally flagged by the Finance Ministry based upon reports and studies done by the Reserve Bank of India (RBI) and the Comptroller and Auditor General of India.

As States engage in clarifications on these reports and studies, it often ends up as exchanges of shifting the blame, especially when the Centre and the concerned State have different political parties in power.

Discretionary expenditure:

  • A key issue of recent debates between the States and the Centre is the quantity and quality of public expenditure by the States.
  • In this context, it is important to distinguish between two kinds of public expenditure.
  1. Mandatory spending is expenditure that is governed by formulae or criteria set forth, rather than by periodic appropriations and as such, unless explicitly changed, the previous year’s spending bill applies to the current year for these items of expenditure.
  2. discretionary spending is expenditure that is governed by annual or other periodic appropriations.
  • While States demand more fiscal space for increasing discretionary spending, the Centre is pushing for more fiscal discipline by reducing the scope for discretionary spending and limiting States to focus on mandatory expenditures.
  • Generally, the aim of enhanced discretionary public expenditure is to stimulate the economy during periods of excess slack, as government spending multipliers would be high and work primarily through consumption channel.
  • Discretionary expenditure is, at the same time, more volatile than mandatory expenditure. Cross country empirical evidence also shows that discretionary expenditure is not contemporaneously correlated with output growth and the correlation is low for the next immediate time period.
  • Further, once started, some of the discretionary expenditure, used to increase demand in the economy, continues for longer periods leading to fiscal stress. This is because of the fact that it is hard to decrease government spending, especially on expenditure heads that raise private consumption, as it requires some counter balancing measures to deal with the resistance from the public.

Sub-national fiscal consolidation:

  • The current debate around freebies needs to be viewed in this larger context of sub-national fiscal consolidation. In a federal system, States’ fiscal stress gets spilled over to the Centre, leading to a situation of overall magnified fiscal slippages.
  • As the economy is recovering from crisis- economic slowdown and COVID-19, there exists a need to adhere to the path of fiscal correction both by the Centre and by the States, as a crisis demands more discretionary spending than normal times. Such additional expenditures need not be and cannot be sustained over longer periods.
  • However, in the Indian context, many States indulge in higher levels of expenditures towards maintaining what they call as their ‘models of welfare provisioning’.
  • While these models claim to have their own merits, the effects of such expenditures on growth of the economy and well-being of the beneficiaries are ambiguous as there is a lacuna of credible evidence.

Fiscal consolidation

  • Sustained increase in welfare expenditure by the States leads to fiscal expansion, which necessitates additional resource mobilisation. When efforts towards additional resource mobilisation yield limited success, as in the case of many States in India, the States resort to borrowings.
  • Fiscal expansion financed through debt and the resultant debt accumulation have important impacts on the economy both in the short run as well as in the long run. While debt per se might not be bad, the utilisation of funds raised through borrowings is important, that is, if it is used for capital formation, it could contribute to the real income of future generations and add to repayment capacity of the government as well.
  • On the contrary, if use of borrowings is to finance only the current expenditure, it poses the risk of debt rising to unsustainable levels.

FRMB Act or Financial Responsibility and Budgeting Management Act:

  • This act was enacted by the Indian Parliament to institutionalize fiscal stability, reduce the fiscal deficit, enhance macroeconomic stability, and overall maintenance of public funds by progressing toward a balanced budget and reinforcing fiscal frugality.
  • As per the FRBM Act 2003, the Indian parliament sets a target for the government to establish financial discipline, improve the administration of public finances, strengthen fiscal prudence, and reduce the country’s fiscal deficit to a tolerable 3% of GDP by 2008.
  • However due to financial crises like the 2008 global financial crisis, 2019 economic slowdown and COVID-19, the target Under FRBMA is being continuously delayed.

N.K. Singh committee to review the FRBM Act, 2003:

 Important recommendations made by the committee:

  1. debt-to-GDP ratio of 40% for the central government, 20% for the state governments together
  2. fiscal deficit of 2.5% of GDP (gross domestic product), both by financial year 2022-23 (this was later relaxed)
  3. There be some flexibility in the deficit targets on both sides, downwards when growth is good and upwards when it isn’t.
  4. Enact a new Debt and Fiscal Responsibility Act after repealing the existing Fiscal Responsibility and Budget Management (FRBM) Act, and creating a fiscal council.
  5. Revenue deficit-to-GDP ratio has been envisaged to decline steadily by 0.25 percentage points each year from 2.3% in 2016-17 to 0.8% in 2022-23.
  6. To deal with unforeseen events such as war, calamities of national proportion, collapse of agricultural activity, far-reaching structural reforms, and sharp decline in real output growth of at least 3 percentage points, the committee has specified deviation in fiscal deficit target of not more than 0.5 percentage points.

Way forward:

  • Data published by the RBI show that in recent years, States’ outstanding debt has registered an upward movement.
  • This could be partly attributed to the implementation of the Ujwal DISCOM Assurance Yojana (UDAY), farm loan waivers, sustained increase in populist welfare measures and growth slowdown especially in 2019-20.
  • A combination of increased expenditure and non-commensurate revenue mobilisation efforts has resulted in increased debt-GSDP ratio (gross state domestic product) between 2013 and 2022. The debt-GSDP ratio of States increased from 22.6 in 2013 to 25.1 in 2018, and further to 31.2 in 2022 (budget estimates).
  • Given the prevailing macroeconomic environment, the debt-GSDP ratio is expected to increase further. This rising trend in debt-GSDP ratio needs to be seen in the context of revenue mobilisation efforts of the States.
  • Overall, there is a decline in revenue receipts due to a fall in the States’ own tax revenue. With dwindling revenue receipts, many States had to opt for expenditure compression to adhere to the fiscal responsibility legislation target.


  • This scenario underscores the importance of fiscal correction at the State level. While there exists a need for raising additional resources at the sub-national levels, expenditure prioritisation has to be carried out diligently.
  • Discussions on freebies need to be understood in this context of squeezing of development expenditure and capital expenditure on some important social and economic services.
  • The Centre, too, on its part needs to demonstrate commitment to fiscal discipline by sticking to announced fiscal glide path to ensure the sustainability of a frictionless co-operative federal structure.

The jurisprudence of bail


Recent cases in higher judiciary where the accused are not being given bail despite enough statutory provisions existing for the same.


  • The jurisprudence of bail in post-independent India, is anchored on the bedrock of Article 21 of the Constitution which safeguards not only life but also liberty by commanding that liberty can be deprived only through the procedure established by law, which must be “just, fair and reasonable”.
  • Procedure Established by Law means that a law that is duly enacted by the legislature or the concerned body is valid if it has followed the correct procedure. Following this doctrine means that, a person can be deprived of his life or personal liberty according to the procedure established by law.
  • This is in contrast to Due process of law doctrine, which not only checks if there is a law to deprive the life and personal liberty of a person but also see if the law made is fair, just and not arbitrary.
  • In India, a liberal interpretation is made by the judiciary after 1978 and it has tried to make the term ‘Procedure established by law’ as synonymous with ‘Due process’ when it comes to protecting individual rights.
  • In Maneka Gandhi vs Union of India case (1978) Supreme Court (SC) held that – ‘procedure established by law’ within the meaning of Article 21 must be ‘right and just and fair’ and ‘not arbitrary, fanciful or oppressive’ otherwise, it would be no procedure at all and the requirement of Article 21 would not be satisfied. Thus, the ‘procedure established by law’ has acquired the same significance in India as the ‘due process of law’ clause in America.
  • The power of the court in granting Bail to the accused comes under both these provisions since it is explicitly provided for in the law (eg, CrPC).
  • The same procedural law which provides for arrest and incarceration, ensures that bail can be sought by an accused through a broad spectrum of provisions ranging from pre-arrest bail to statutory bail.
  • While the former envisaged under Section 438 of the Code of Criminal Procedure (CrPC) enables the accused to approach a Sessions court or High Court seeking a direction to release him on bail in case he is arrested on a non-bailable offence, the latter, as conceived under Section 167 of the CrPC, vests with the accused the right to be released if the investigation is not completed within ninety days or sixty days, as the case may be, depending on the severity of the alleged offence.

About bail

Bail, in law, means procurement of release from prison of a person awaiting trial or an appeal, by the deposit of security to ensure his submission at the required time to legal authority.

Statutory or default bail:

  • Code of criminal procedure (CrPC) sets deadlines for investigative agencies to complete investigations during which the accused can be kept in custody. If the agency fails to meet these deadlines, then the accused becomes entitled to default or regular bail.
  • Under section 167 CrPC, the maximum period of detention is 90 days.

Key principles laid down on Statutory Bail:

  • Default or statutory bail is an indefeasible right’, regardless of the nature of the crime.
  • Requirement for the grant of statutory bail is that the right should be claimed by the person in custody. If the charge sheet is not filed within the stipulated period, but there is no application for bail under Section 167(2), then there is no automatic bail.
  • Time Period for Statutory Bail- For most offences, the police have 60 days to complete the investigation and file a final report before the court.
  • However, where the offence attracts a death sentence or life imprisonment, or a jail term of not less than 10 years, the period available is 90 days.
  • At the end of this period, if the investigation is not complete, the court shall release the person “if he is prepared to furnish bail”.

Statutory Bail Provision under Special laws:

  • The 60 or 90-day limit is only for ordinary penal law. Special enactments allow greater latitude to the police for completing the probe.
  • In the Narcotic Drugs and Psychotropic Substances (NDPS) Act 1985, the period is 180 days. However, in cases involving substances in commercial quantity, the period may be extended up to one year.
  • In the Unlawful Activities (Prevention) Act 1967, the default limit is 90 days only, which can be extended to another 90 days.
  • This extension in these cases can be granted only on a report by the Public Prosecutor indicating the progress made in the investigation and giving reasons to keep the accused in continued detention.

The basic presumption of innocence :

  • It is a foundational postulate in India’s criminal jurisprudence. This is the main reason why an accused is usually released on bail pending investigation and trial except for a few offences under the Penal Code as well as offences framed under special statutes like the Unlawful Activities Prevention Act, the Narcotic and Psychotropic Substances Act and the Prevention of Money Laundering Act, all of which impose extremely rigid conditions for the grant of bail.
  • While bail refers to the conditional release of a person from confinement or custody during investigation and trial, it can also be sought during the appellate stage to prevent endless internment during the pendency of appeal though the benefit of the presumption of innocence is not available at the latter stage.
In the words of Justice Krishna Iyer, “The issue of ‘Bail or Jail’ — at the pre-trial or post-conviction stage — although largely hinging on judicial discretion, is one of liberty, justice, public safety and burden of the public treasury, all of which insist that a developed jurisprudence of bail is integral to a socially sensitised judicial process.

Grant of bail as the rule:

  • A common misnomer that precipitates public apprehension is the perception that jail is and ought to be a necessary consequence of arrest and the failure to jail an accused post-arrest endangers public justice.
  • In fact, prolonged detention of an accused pending trial may convert the process itself into a punishment rendering a finding of acquittal practically useless as the accused would have suffered much of the punishment by then.
  • Unless bail is granted to an accused who is presumed to be innocent in the eyes of the law until guilt is proven, he may not be able to take the necessary steps lawfully permissible to defend himself. The Supreme Court has time and again reiterated that “bail is the rule and jail is the exception”.
  • The CrPC defines “bailable offence” as an offence which is shown as bailable in the First Schedule of the CrPC , or which is made bailable by any other law for the time being in force; and “non-bailable offence” means any other offence.
  • While bail is a matter of right in bailable offences, in non-bailable offences, the grant of bail is at the discretion exercised by the judge taking note of the factual aspects of the case.
  • It was held by the Calcutta High Court in 1923 “ that the discretionary power of the Court to admit to bail is not arbitrary, but is judicial”, and “is governed by established principles.”( Nagendra vs King Emperor).

Judicial discretion and its requirements:

  • As declared by the Supreme Court, “the grant or denial is regulated, to a large extent, by the facts and circumstances of each particular case. But at the same time, right to bail is not to be denied merely because of the sentiments of the community against the accused.
  • The primary purposes of bail in a criminal case are to relieve the accused of imprisonment, to relieve the State of the burden of keeping him, pending the trial, and at the same time, to keep the accused constructively in the custody of the Court, whether before or after conviction, to assure that he will submit to the jurisdiction of the Court and be in attendance thereon whenever his presence is required.”
  • However, application of the mind is a necessary pre-requisite of a sound judicial order. In 2022, the Supreme Court derided the recent tendency of granting or refusing bail through terse orders by observing that “reasoning is the life blood of the judicial system. “

The triple test:

The grant of regular bail is usually guided by what is referred to as the triple test —

  • the ascertainment of whether the accused is at flight risk
  • possibility of the accused tampering with the evidence
  • possibility of the accused influencing witnesses

In addition to the above three, it was held by a three-judge-bench of the Supreme Court ( P. Chidambaram Case (2019)) that the gravity of the offence may also be an additional consideration which may be ascertained by the sentence prescribed for the offence alleged to have been committed.

Way Forward:

  • Increasing awareness of laws among police personnel, increasing the number of police personnel and stations in proportion to the number of complaints in an area, and including social workers and psychologists in the criminal justice system.
  • The focus also needs to be on the victim’s rights and smart policing. There is a need to study the rate of conviction of police officials and their non-compliance of law.
  • Increase the inclusiveness in the police force from the different section of the society, so as to provide with balanced mindset to avoid indiscriminately arrests against any caste/class/community.
  • SC’s directions on bail granting by lower courts must be followed upon and strictly adhered to. Bail is the norm and jail is the exception- this maxim should always be respected.


As highlighted by the Supreme Court, a separate law on bail should be drafted for effective management of under trial cases in the country. The new Bail Law should be the cornerstone of bail reforms in the country.


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