Page 339 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 26: 12 and 13 Finance Commissions
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Revised Roadmap for Fiscal Consolidation Notes
The Thirteenth Finance Commission has recommended fiscal consolidation through the elimination
of revenue deficit as the long-term target for both the Centre and States.
Following a design similar to that adopted by the recent Finance Commissions, the Thirteenth Finance
Commission indicated a normative discipline for both Centre and States; with equal treatment which
entailed no automatic priority for any level of Government and a focus on equalization (and not
equity). The latter signaled the intent of the Thirteenth Finance Commission to ensure that States and
local bodies have the fiscal potential to provide comparable levels of public service at reasonably
comparable levels of taxation. This principle does not guarantee uniformity in public services across
the country; but it addresses the fiscal requirements of each jurisdiction to enable such uniformity.
The Commission recommended as follows :
• The revenue deficit of the Centre needs to be progressively reduced and eliminated, followed
by emergence of a revenue surplus by 2014-15.
• A target of 68 per cent of GDP for the combined debt of the Centre and states should be achieved
by 2014-15. The fiscal consolidation path embodies steady reduction in the augmented debt
stock of the Centre to 45 per cent of GDP by 2014-15, and of the states to less than 25 per cent of
GDP, by 2014-15
• The Medium Term Fiscal Plan (MTFP) should be reformed and made a statement of commitment
rather than a statement of intent. Tighter integration is required between the multi-year
framework provided by MTFP and the annual budget exercise.
• Along with the annual Central Budget/MTFT, some disclosures have been recommended. They
include
(i) Detailed breakup of grants to states under the overall category of non-plan and plan grants.
(ii) Statement on tax expenditure to be systematised and the methodology to be made explicit.
(iii) Compliance costs of major tax proposals to be reported.
(iv) Revenue Consequences of Capital Expenditure (RCCE) to be projected in MTFP.
(v) Fiscal impact of major policy changes to be incorporated in MTFP.
(vi) Public Private Partnership (PPP) liabilities to be reported along with MTFP.
• Transfer of disinvestment receipts to the public account to be discontinued and all disinvestment
receipts be maintained in the consolidated fund.
• Government of India should list all public sector enterprises that yield a lower rate of return on
assets than a norm to be decided by an expert committee.
• The FRBM Act needs to specify the nature of shocks that would require a relaxation of FRBM
targets.
• In case of macroeconomic shocks, instead of relaxing the states’ borrowing limits and letting
them borrow more, the Centre should borrow and devolve the resources using the Finance
Commission tax devolution formula for inter se distribution between states.
• Structural shocks such as arrears arising out of Pay Commission awards should be avoided by,
in the case of arrears, making the pay award commence from the date on which it is accepted.
• An independent review mechanism should be set-up by the Centre to evaluate its fiscal reform
process. The independent review mechanism should evolve into a fiscal council with legislative
backing over time.
• Given the exceptional circumstances of 2008-09 and 2009-10, the fiscal consolidation process of
the states was disrupted. It is expected that states would be able to get back to their fiscal
correction path by 2011-12, allowing for a year of adjustment in 2010-11.
(i) States that incurred zero revenue deficits or achieved revenue surplus in 2007-08 should
eliminate revenue deficit by 2011-12 and maintain revenue balance or attain a surplus
thereafter. Other states should eliminate revenue deficit by 2014-15.

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