Budget Stabilisation Fund (BSF) by a sovereign authority intends to help the economy build up sufficient resources in normal times so that in a period of stress, they can address the shortfall in resources to avoid any disruption in public expenditure.
The history of BSF, which is a “rainy day fund,” dates back to 1953 when Kuwait first established it. After that, several countries introduced such stabilisation funds. Most of the states in the USA have some form of stabilisation funds.
In Odisha, since 2005, there has been a remarkable progress in state finance. Continuity in revenue surplus, low debt burden and higher capital outlay must have been enabling factors for Odisha government to implement the Budget Stabilisation Fund in 2022-23.
The creation of BSF is more justified when mining royalty has more than 40 per cent share in state’s own revenue. High-frequency data on mining royalty from August 2017 to till April 2022 reveals annual volatility in revenue collection on account of mining royalty is around 23 per cent in Indian currency. This very high price volatility is due to extraneous adverse factors such as fluctuation in international commodity prices and rupee depreciation against the greenback.
The enactment of the Odisha Fiscal Responsibility and Budget Management (FRBM) legislation, 2005 provided a rule-based framework for the administration of the Fiscal Consolidation process in Odisha The enactment of the Odisha Fiscal Responsibility and Budget Management (FRBM) legislation, 2005 provided a rule-based framework for the administration of the Fiscal Consolidation process in Odisha.
Allocating Rs 10,000 crore for the Budget Stabilization Fund in 2022-23, Odisha became the first Indian state to establish a BSF. An additional provision of Rs 3,700 crore was allocated in the supplementary budget in FY 2022-23 towards BSF to enhance the corpus to Rs 13,700 crore. In the budget statement FY 2023-24, the BSF corpus is further enhanced to Rs 18,700 crore by an additional provision of Rs 5000 crore. The outstanding BSF corpus fund is calculated at 10 per cent of the budgeted revenue receipt of Rs 1,84,500 crore.
In consultation with RBI, the corpus of BSF should be utilised in investing in both sovereign and sub-sovereign short-term financial instruments which are very liquid. An optimal mix of these financial instruments will yield a good return for the State.
The banks in India are already maintaining capital conservation buffer (CCB) as rainy day fund to address any liquidity shock in the financial sector. Along with the banks, if other states maintain the rainy day fund to address immediate liquidity shock, then the system-wide liquidity shock and macroeconomic fluctuations can be mitigated significantly.
Odisha is unique among all states to create BSF because of its continuous and persistent effort to create a surplus in revenue account and FRBM-compliant financial policy. The establishment of BSF in practice reflects a concerted push toward the next generation of reforms in public financial management (PFM) in Odisha signifying fiscal risk identification, fiscal risk quantification and fiscal risk mitigation. Therefore, BSF entails the risk sensitiveness of Odisha government.
Dr Asit Mohanty Professor (Finance), XIMB