NK Singh, chairman of the Fifteenth Finance Commission (15th FC), said on Friday that the panel will consider recommending a range for yearly fiscal deficit targets, instead of a fixed number, as is the practice now.
Speaking to reporters after a meeting of the Commission’s economic advisory council, Singh said the body had not sought any extension and will finish its report for 2021-22 to 2025-26 by October 31. Singh said the need to fundamentally revisit the Fiscal Responsibility and Budget Management (FRBM) Act, under which the Centre prescribes a fiscal deficit target, was discussed at the meeting. The target for 2020-21 is 3.5 per cent of gross domestic product (GDP).
“There is merit in looking at a range rather than a number. It would be in congruity with monetary policy targets. Giving a range will be a more realistic proposal, and will lead to less accounting engineering,” Singh said.
Singh clarified that these points were made at the meeting of the economic advisory council and will be considered by the commission. He said if the commission recommends a range it will also recommend a mean target, like the inflation target given to the Monetary Policy Committee. The MPC’s mandate is to keep inflation below 4 (+/- 2) per cent.
“Giving a range will mean revisiting the FRBM Act. That law provides a fixed point. These are the issues we need to mull over,” he said.
Singh made it clear that the 15th FC would complete its report by October 31. “The Finance Commission is not seeking any extension of time. We will finish our report on October 31 and thereafter seek an appointment with the President of India to submit the report. We had already gotten a year’s extension.”
He admitted that given the uncertainty surrounding the Covid-19 pandemic, the 15th FC faces a tough task providing recommendations and projections for the five-year award period.
“The forward path would be dependent on how abiding and deep are the structural reforms which were announced as part of the ‘Atmanirbhar Bharat’ package. We may not have the luxury of a linear path on revenue buoyancy for each of the award years. However, the devolution we cannot alter for each of the five award years. We can only give one devolution for the full five years,” he said.
The virtual meeting of the advisory council was attended by members of the commission and economists such as Chief Economic Advisor Krishnamurthy Subramanian, Arvind Virmani, Indira Rajaraman, DK Srivastava, M Govinda Rao, Pronab Sen, and Shankar Acharya.
“The advisory council felt 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,” said an official statement.
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,” it said.
Singh said that the council was of the view that the general government (Centre and states) debt relative to GDP is likely to increase steeply in the initial years because of an increase in expenditure commitments in the face of dwindling revenues.