The Commission also recommended that instructions for a uniform classification code for all States down to the object head be issued.

K.R. Srivats

New Delhi, March 1

FEARING that the lack of a standard definition for revenue deficit could lead to misuse of debt relief scheme through creative accounting, the Twelfth Finance Commission (TFC) has called to standardise the definition of revenue and fiscal deficit.

The apprehension stemmed from the fact that the debt write-off scheme mooted by TFC is linked to the revenue deficit of States.

"It is necessary to guard against any attempts to defeat the objectives of the scheme (debt write-off) through creative accounting," says the TFC report tabled in Parliament on Saturday. The Commission also recommended that instructions for a uniform classification code for all States down to the object head be issued.

Under the debt write-off scheme, mooted by TFC and accepted by the Union government, the repayments due from 2005-06 to 2009-10 on Central loans contracted up to March 31, 2004, and recommended to be consolidated would be eligible for write-off.

"The quantum of write-off of repayment will be linked to the absolute amount by which the revenue deficit is reduced in each successive year during the award period. The reduction in the revenue deficit must be cumulatively higher than the cumulative reduction attributable to the interest relief recommended by TFC," says the TFC report.

Further, the scheme provided that the State fiscal deficit must be contained at least to the level of 2004-05. In effect, if the revenue deficit is brought down to zero, the entire repayments during the period would be written off.

The enactment of the fiscal responsibility legislation would, however, be a necessary pre-condition for the State to avail itself of debt relief under the scheme.

On the issue of absence of standard definition of revenue deficit, the TFC report has noted that certain States were being allowed selectively to include/exclude the deficit of major State Government entities such as the State electricity board and road transport undertakings for the purpose of measuring performance.

"We have also noticed that some States have started classifying the grants to local bodies as capital expenditure. Some States are already meeting the deficit of their electricity boards by granting loans or investing in equity rather than providing transparent subsidies," says the report.

(This article was published in the Business Line print edition dated March 2, 2005)
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