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States have better track record compared to the Centre when it comes to following fiscal responsibility road map and can be given more leeway to meet the deficit targets, said a government-appointed panel.
For states, the Fiscal Responsibility and Budget Management Act (FRBM) panel has suggested a fiscal deficit glide path of 0.16 per cent per annum over a period of eight years.
As per the N K Singh-headed panel report, the combined fiscal deficit of states needs to be brought down from 2.82 per cent in the current fiscal to 1.70 per cent in 2024-25.
In case of debt-GDP ratio of states, the report said it ought to be reduced from 21.65 per cent this fiscal to 21.02 per cent in 2024-25.
In case of the Centre, however, the panel wants the fiscal deficit -- the difference between expenditure and receipts -- should be brought down to 2.5 per cent by 2022-23 from 3.2 per cent in the current fiscal.
The Centre and state governments borrow funds from the market to fund the deficit, thereby increasing public debt.
The panel has also suggested a gradual reduction in the Centre's debt-GDP ratio from 49 per cent at present to 40 per cent by 2023.
Currently, India's debt-GDP ratio stands at around 67 per cent, including both the Centre and states. The Centre alone accounts for 49 per cent of this debt.
"The reduction of the states' share in the size of the general government was a direct consequence of better implementation of fiscal responsibility laws by the states relative to the central government," the FRBM panel said.
The FRBM said that states, collectively, have executed a remarkably successful fiscal consolidation.
"We recommend that states have taken collectively be allowed to maintain their debt-GDP ratios at FY2016-17 levels through fiscal consolidation in the form of a steady but modest reduction in the primary and fiscal deficits over an 8-year timeframe," it added.
While the introduction of VAT and high growth indubitably helped keep revenues buoyant, the fact that revenue buoyancy was seen across rich and poor states indicates that there was a collective effort to achieve revenue targets, it said.
"State governments did not fully utilise their higher revenues to increase expenditures in good times, a course of action that is politically very attractive. Rather, they exercised political will and executive restraint," it added.
The states, FRBM panel report said, have a prudent approach to their finances and it would be incorrect to dismiss their improved fiscal performance as being primarily due to factors exogenous to their policy action.
The total outstanding liabilities of state governments also continued to decline relative to the Centre, it noted.
Since states collectively run a revenue surplus, low debt relative to their share in total government expenditure, and have fiscal prudence, the panel recommended that states be allowed to maintain their debt-GDP ratios at 2016-17 levels.
It suggested that the 15th Finance Commission could also make broad recommendations about the debt trajectories of individual states, based on their historic track record of fiscal prudence and health.
The FRBM committee was set up in May last year to review the working of the FRBM Act over the last 12 years and suggest the way forward 'keeping in view the broad objective of fiscal consolidation and prudence and the changes required in the context of the uncertainty and volatility in the global economy'.
The report of the panel was made public on Wednesday.
Among other things the committee wanted the existing FRBM Act, 2003, to be replaced by a new Debt and Fiscal Responsibility Act and suggested setting up of a 'fiscal council', to provide forecasts and analysis for the fiscal deficit as well as advise the Finance Ministry on escape clauses.
"The maxim 'you cannot spend your way to prosperity' is now widely accepted. Fiscal policies must, therefore, be embedded in caution rather than exuberance; in restraint than profligacy," the report said.
