Report calls for amending law to improve monitoring and compliance
The Thirteenth Finance Commission has recommended that the combined debt of the Centre and the states be capped at 68 per cent of the Gross Domestic Product (GDP) by 2014-15 as part of the revised fiscal consolidation roadmap.
Such a cap has to be adhered to by the Centre in eliminating revenue deficit and lower fiscal deficit to 3 per cent of GDP over the next five years. While prescribing zero revenue deficit as the golden rule, the Centre should have revenue surplus by 2014-15. Ditto for the states, the Finance Commission said.
Within the overall cap on borrowings, the commission has asked the Centre to lower its debt to 45 per cent of GDP from 54.2 at present. Similarly, states will need to lower their debt to 25 per cent from 27 per cent.
At present the combined debt is of the order of 82 per cent of GDP, which is higher than the previous finance commission’s target of 75 per cent.
The Fiscal Responsibility and Budget Management (FRBM) roadmap set out by the commission recognised the need to allow the fiscal system to adapt to exogenous shocks like the global economic downturn, which reversed the path to fiscal correction in which the economy was headed since 2004.
Besides exogenous shocks, the report also refers to policy processes that have distorted the fiscal correction path. In this regard, the report discusses the Sixth Pay Commission recommendations that have cost the Centre Rs 28,160 crore on arrears alone on a salary base of Rs 44,360 crore.
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The report suggested that the government should do away with the need for arrears in future and begin payments from the day such recommendations are accepted by the government.
To bring state fiscal deficit to a path of correction, the commission suggested the National Small Savings Scheme be reformed into a market-aligned scheme. Moreover, loans to states from the National Small Savings Fund contracted till 2006-07 and outstanding in 2009-10 should be reset at 9 per cent common interest rate per annum, instead of 10.5 per cent. The total benefit that would accrue to states on the outstanding loan of 2009-10 has been estimated at Rs 13,517 crore during the next five years.
In the light of the changed economic scenario and a revised outlook on fiscal correction, the report has recommended changes in the design of the existing fiscal responsibility legislation.
The report states that the macroeconomic stabilisation and counter-recessionary actions in case of a macroeconomic crisis should be the responsibility of the central government and, therefore, the adequate measures involving fiscal costs should be borne by the Centre.
Therefore, the commission suggested that instead of raising the borrowing limits of states, the Centre should assume the responsibility of mobilising the entire additional resource. The Union government resources should be mobilised to the states in the form of increased devolution.
The report also suggests that the FRBM Act should be modified to specify the nature of shocks that would require a relaxation targets specified by legislation.
The reports suggests that the Medium Term Fiscal Plan should clearly state the parameters underlying expenditure and revenue projections and the range within which such parameters are valid while meeting the FRBM Act targets. Such a step will enable the government to make an evidence-based case for relaxation of these targets if a macroeconomic crisis strikes.
Moreover, the report suggested that the Centre should set up an independent review mechanism, which will evolve into a fiscal council with legislative backing over a period of time.
Such an independent body will evaluate the fiscal reform process of the Centre.
Moreover, the report said that the fiscal consolidation of states would be on a path of correction by 2011-12.