Finance panel to consider recommending a range for fiscal deficit, debt-GDP ratio

Business & Economics

On Friday, the advisory panel discussed a wide gamut of issues around GDP growth, tax buoyancy of the Centre and the states, GST compensation and fiscal consolidation.

Given the massive economic disruption due to Covid, the 15th Finance Commission will consider a suggestion to recommend a range instead of a fixed number for fiscal deficit and debt-to-GDP ratio in its report for award period of FY22-FY26, commission chairman NK Singh said on Friday.

“We do recognise that giving a range both for the Centre and an equally that for the states may be more in tune with the reality than giving a fixed point due to the fact that a more certain world has moved to a somewhat more uncertain world,” Singh said after a meeting of the commission’s advisory council. Many advisory panel members suggested to consider a range for the key fiscal targets similar to the one on retail inflation (4% plus/minus 2%) set by the Monetary Policy Committee. “We need to be mindful that giving a range always have a deep inclination to only operate at the upper end of the range. But, we will be giving a mean target in case we do decide,” Singh said.

According to the FRBM mandate, the Centre’s fiscal deficit is to be 3% of GDP, however, that has eluded in the past decade with resetting of target multiple times. The fiscal deficit, which came in at 4.6% in FY20, is pegged to be 3.5% (to rise substantially, may be 6-7%) in FY21, before coming down to 3.1% in FY23.

The Singh-led committee on fiscal management has said that overall public debt-to-GDP ratio should be at 60% by 2022-23—40% for the Centre and 20% for states. The outstanding debt of states has risen over the last five years to an estimated 25% of the GDP in FY20, posing medium-term challenges to its sustainability. The Centre’s debt-to-GDP was estimated to be around 49% of GDP in FY20, up from 48.7% in FY19, taking the general government debt-to-GDP of 74% (actual could be around 85% in FY21 as debt has increased and GDP size will shrink).

The commission, which will submit its award report for five years (FY22-FY26) by end-October, will have four volumes.

On Friday, the advisory panel discussed a wide gamut of issues around GDP growth, tax buoyancy of the Centre and the states, GST compensation and fiscal consolidation. Specific issues relating to public expenditure on health, investment revival, recapitalisation of the financial system and its impact on public finances, focus on strengthening of defence capabilities, emerging trends in GST mop-up and its connection with improvements in its technology platform were also discussed.

The panel felt that the Commission is faced with unprecedented 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 via borrowings and the path of fiscal consolidation. The members also felt that the panel will have to think unconventionally, especially in treating the five years at hand. They advised that the base year FY21 and the first year of FY22 may need to be viewed differently from the remaining four years when the revenue situation is likely to improve gradually.

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