The 13th Finance Commission sounded an alarming bell on the high combined debt-to-GDP ratio, and suggested states to bring it down to 25 per cent by 2014-15. The report said that such target was feasible as in the period 2005-09 states have undertaken considerable fiscal correction. The aggregate debt-to-GDP ratio for states is not expected to be higher than 30 per cent in 2009-10.
Such high debt-to-GDP ratio is stated to be temporary as it is a result of counter recessionary expenditure by state governments. In the backdrop of government of India relaxing borrowing limits of states to 3-5 per cent and 4 per cent of Gross State Domestic Product (GSDP) for 2008-09 and 2009-10 respectively, the commission report states that reduction of debt-to-GDP ratio from 27 per cent in 2007-08 to 25 per cent in 2014-15 is easily achievable.
States, like the Centre, were asked to aim at a zero revenue deficit by 2014-15. Moreover, states were asked to assess the viability of their loss making Public Sector Units (PSUs) and were asked to identify those functioning in non core areas for closure.
Most states in India currently have no revenue deficit, however, in the case of states having revenue deficit in 2007-08, the report said that an abrupt bringing down of revenue and fiscal deficit will hit capital expenditure. This will be detrimental for the state economy, therefore the report asked states to bring down revenue and fiscal deficit gradually giving priority for availability of capital expenditure.
Kerala, Punjab and West Bengal are the states which have revenue deficit of 2.3 per cent, 2.9 per cent and 2.7 per cent of GSDP, respectively in 2007-08. The respective fiscal deficits for these states were 3.6 per cent, 3.5 per cent and 3.8 per cent of their GSDP. Six other states, which are classified as special category states include Jammu and Kashmir, Manipur, Mizoram and others with fiscal deficits ranging from 4.1 per cent to 8.5 per cent of GSDP also have been asked to reduce their fiscal deficits to 3 per cent by 2014-15.
In order to facilitate the implementation of the above roadmap, the report suggested that state specific grants should only be released when states comply with Fiscal Regulation Legislation. Moreover, Centre should set net borrowing limits for states based on fiscal deficit path outlined for each state.
Moreover, the Commission has assumed that there would be no net disbursement of loans from the Centre to states during the projected period as the recovery from consolidated loan of Rs 1.23 lakh crore, in twenty equal installments, is equivalent to Centre's loan of Rs 6,050 crore to states as an external aid.