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The 15th Finance Commission Chairman NK Singh has called for focus on quick revival of economy and not on fiscal consolidation and increased public debt.
Talking to media, after the conclusion of a two-day meeting with the Finance Commission’s Economic Advisory Council, Singh said: “This is not the time to talk of fiscal consolidation. I think what needs to be protected is the expenditure over fiscal deficit and this is exactly what the Central government has done.”
OECD defines fiscal consolidation as concrete policies aimed at reducing government deficits and debt accumulation. The consolidation plans and detailed measures are given as a per cent of nominal GDP. For example, the Budget presented in February pegs the deficit at 3.5 per cent for FY21. This was projected to decline to 3.3 per cent in FY22 and further to 3.1 per cent during FY23. However, the pandemic has disturbed the Government’s mathematics. With more and more decline in revenue and higher expenditure, the Government has already announced additional borrowing of ₹4.2 lakh crore, taking the total borrowing to ₹12 lakh crore. There is no surety there will be no further borrowing.
Base Year for award
As a matter of principle, the Commission considers the year as base year during which it recommends award (the formulae of sharing Central’s revenue from taxes among States). Since, the Commission has to make its recommendation by October, , theoretically FY-21 should be taken as base year to suggest the devolution formulae for FY22 to FY26. But considering the difficulty during this year, there are views that the Commission should deviate.
“One of the options is if we overlook the present year why not choose the following year (2021-22) and look at the skewed likely Q2 results to make projection. Thirdly, whether you take the average growth rate of the year before the pandemic as base year,” he said. Each one of these options is brought with its own methodological challenges and probability of assumptions. The Commission will debate them internally.
GST compensation
When asked about borrowing as an option to pay GST compensation to States along with Delhi and Puducherry, he said borrowing by Centre is backed by securities of Consolidation Fund of India. Similarly borrowing by State(s) is backed by securities of Consolidation Fund of State(s). According to him, it needs to be seen what will be principle for borrowing to pay GST compensation. It may be noted that the GST Council will meet next month to consider such borrowings.
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