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15th Finance Commission - Fiscal Roadmap discussion
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- What FFC feels: The chairman of 15th
Finance Commission chairman N K Singh said that no fiscal roadmap or debt
roadmap is meaningful unless it is for the general government, i.e. both the
Centre and states. The FFC had recognised the need for flexibility in the
fiscal framework, given the challenging economic conditions of India today.
- FRBM Review Committee: NK Singh was also the chairman of the FRBM (Fiscal Responsibility and Budget Management) Review Committee constituted by the government in 2018. Everything changed after that! A serious problem of the FRBM Act of 2018 was that it concerned the central government. States were not part of that process. But India needs a path for the general government on both fiscal deficit and debt, and hence the FFC suggested the constitution of an inter-governmental body. Inter-government means the Centre and the states.
- Changing fiscal norms: The second important change is the acceptance that most fiscal norms need to be revisited. Now is the time for fiscal flexibility, not rigidity. Hence the FFC did not give fixed point in its report. A fixed point can lead governments to indulge in pro-cyclical behaviour, worsening the crisis.
- Transparency: Another change in FFC report is an emphasis on the need for much greater transparency in the accounting framework. Are government numbers credible? The issues include those of the parastatal and sub-parastatals and contingent liabilities, and so on, masking the actual incidence of fiscal deficit. The Budget 2021-22 tried sincere attempt to make the process transparent. Equally, the states need to be incentivised for adopting much better accounting standards.
- Power sector problems: The exposure of almost all states to the power sector is a contingent liability that is always ready to explode. Should that not get higher attention going ahead in terms of transparency? It should, and the FFC report has ensured that. All the 28 states it visited, the one giant elephant in that room is the power sector, the unpaid liabilities of power distribution companies. So, 0.5% extra borrowings by the states contingent on the fulfilment of performance criteria - the unpaid liabilities of the power distribution companies and improving the working of these distribution companies in terms of billing cycles, the working of power regulators, getting away from regulatory capture and enabling them to meet their finances.
- GST problems: There are two broad issues -
- First those that deal with the procedural and process simplifications. These are better invoice matching, preventing invoice manipulation, improving quality of compliance and better technology platform. GST realisation significantly will improve once these are taken care of.
- Second are more important structural issues, relating to doing away with inverted duty structure, broad-banding of rates. India can't have an ideal, one rate. In a complex country like India that idea is elusive. But India can have three rates - the standard rate, a clear merit rate and a clear demerit rate.
- Then, decreasing or moving towards a genuinely revenue neutral rate, which does not mean increasing the rates. But a revenue neutral rate means certainly recalibrating it in a manner which enables you to be. Finally, predictability and stability on the rate structure. India cannot have a situation where it is subject to frequent changes.
- Cesses and surchages: States have had issues with imposition of cesses, because they don't get a share of that. The 12th, the 13th and certainly the 14th Finance Commission also, the FCs commented extensively on this problem.
- The total size of the gross revenue receipts (GRR), in a five-year period, would be Rs 154 lakh crore.
- From the GRR, take out things like the RBI dividend to the government, spectrum-related revenues and other things, and the gross tax revenue (GTR) of the government is achieved. That comes to Rs 134 lakh crore.
- Now, from the GTR, you get the divisible pool, which becomes only Rs 103 lakh crore.
- Out of this Rs 103 lakh crore, the 41% devolution to the states roughly gives them about Rs 42 lakh crore, plus the revenue deficit grants of Rs 2.95 lakh crore; add to that the third-tier grants, which is about Rs 4.5 lakh crore; add to that the disaster management grants, which is about Rs 1.3 lakh crore.
- But indeed, the size of the divisible pool has shrunk from Rs 134 lakh crore to Rs 103 lakh crore on account of cess, surcharges and other liabilities. (Sadly, the cess and surcharge issue is part of the Constitution).
- The next FC: This report runs till 2026. The next finance commission will be from 2027. By then, India needs a cleaner arrangement on what are the obligations of the central government, and of the states. A fundamental rethink on issues of constitutional amendments of the Seventh Schedule and Article 282 of the Constitution will be needed. A more viable consultative mechanism of acting in partnership between the centre and the states is needed. In nations like Australia and South Africa, the Finance Commissions are a permanent body. The issue of cess and surcharge must be resolved on a wider framework. India must move to a much higher growth trajectory with more buoyant revenues.
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