15th FC panel suggests giving range for fiscal deficits for Centre, states

Singh said the issue of fiscal consolidation road map, particularly general government debt to GDP target, needs to be revisited and it will be daunting challenge to bring it to the level the FRBM committee had projected.
The economic advisory panel of the 15th finance commission on Friday suggested providing a range rather than a number as fiscal deficit targets for both the Centre and states in a report, the commission's chairman N K Singh said on Friday.

Singh said as the pandemic has created a more uncertain world, the commission did not brush aside the suggestion, however, a final decision on providing a range as fiscal deficit targets is yet to be taken.

"Looking at the uncertainties, I felt that, there was merit at looking at a range than a number... Having a range will be in congruity with what you have in monetary policy with +/- 2 per cent (inflation target) and that we could, no doubt, while giving fiscal number say that the central number is this, and it will be more realistic," Singh told reporters here.
Singh, however, said that providing a range of fiscal deficit would require amendments in the Fiscal Responsibility and Budget Management (FRBM) Act.

"It (providing a range) would mean revisiting the FRBM law which provides for giving a fixed point of fiscal deficit," Singh said.

In the 2020-21 Budget, the government had used the escape clause of 0.5 per cent relaxation provided in the FRBM Act for the last year as well as the current financial year, changing the targets for fiscal deficit to 3.8 per cent and 3.5 per cent of GDP, respectively.

However, with the Centre borrowing a record Rs 12 lakh crore from the market this fiscal, and states' borrowing ceiling increased to 5 per cent of their GDP from 3 per cent, the general government deficit is expected to be higher than what was projected in Budget before the pandemic.

Under the monetary policy framework, the RBI has been mandated to contain inflation at 4 per cent, with a band of +/-2 per cent.

Singh said the issue of fiscal consolidation road map, particularly general government debt to GDP target, needs to be revisited and it will be daunting challenge to bring it to the level the FRBM committee had projected.

Singh said the 15th Finance Commission will submit its four volume final report by October-end.  The Commission is scheduled to submit its final report on October 30, covering fiscal years 2021-22 to 2025-26.

In a statement, the commission said the meeting with the economic advisory panel discussed a wide gamut of issues around GDP growth, tax buoyancy of the Centre and the states, and fiscal consolidation.  The Advisory Council felt that the Finance Commission is faced with an unprecedented situation of uncertainties and will have to take a nuanced approach towards tax devolution to the states, other transfers, financing of expenditures in the midst of revenue strains including through borrowings and the path of fiscal consolidation.

The members of the council also felt that the commission will have to think unconventionally, especially in treating the 5 years at hand from 2021-22 to 2025-26.  "They advised that the base year 2020-21 and the first year of 2021-22 may need to be viewed differently from the remaining four years when the revenue situation is likely to improve gradually," the statement said.  Different views were expressed on the GDP growth in the current year in terms of the quarterly built-up, and the growth revival that is likely in the subsequent years.  

The Advisory Council felt that the general government debt relative to GDP is likely to increase steeply in the initial years, however, the purpose should be to endeavour to bring it down in the subsequent years.

In the initial years, this ratio will be affected by the increased revenue-expenditure imbalance on the numerator and the downward pressure on GDP on the numerator, the statement added.

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