What should Modi govt do when revenues are down? Hear from Finance Commission Chairman NK Singh

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June 26, 2020 8:25 PM

NK Singh said this year fiscal numbers look to be way out of what they have been considered, and the finance ministry itself has increased their borrowings from the Reserve Bank and the state governments are also going to borrow more. 

N K Singh, 15th Finance Commission Chairman

The government need not at present focus on fiscal consolidation and increased public debt, rather should concentrate on the fastest possible revival of the economy, the 15th Finance Commission Chairman, N K Singh, said on Friday. He said there is acute pressure on the finances of both the central and state governments given the much lower growth number and revenue receipts.

Speaking to reporters after the meeting of the commission with the economic advisory council, Singh said this year fiscal numbers look to be way out of what they have been considered, and the finance ministry itself has increased their borrowings from the Reserve Bank and the state governments are also going to borrow more. He further said, “This is not the time to talk of fiscal consolidation. This is the time in which the world believes, I think that what needs to be protected is the expenditure over fiscal deficit and this is exactly what the central government has done.

“They have addressed the issue of where the money and finances should go but going beyond the current and next year, central government is conscious, everyone is conscious… how to return to the path and what kind of a return trajectory both on fiscal deficit and debt can be considered reasonable.

One of the terms of reference of the 15th Finance Commission is to suggest a consolidated road map in terms of the deficit, finances, debt of the general government for 2021-22 to 2025-26.

“This year we must not concentrate on the fiscal or the debt. We must concentrate on the fastest possible revival of the economy. We must concentrate on ensuring that in terms of the painful transition, the pain is minimised in multiple interventions, and multiple interventions have taken place,” Singh said.

Rating agencies have projected India’s fiscal deficit (combined Centre and states) to be around 11-12 per cent of GDP in current fiscal, while government debt to touch 84 per cent of GDP from 71 per cent last fiscal. “Where we will end up in terms of fiscal numbers this year, I cannot say. Part of the reason is that I cannot say that the pandemic has played itself out fully…,” he said.

“Let me say that clearly by the fact that the finance ministry themselves have increased the borrowing requirements, it is unlikely that they will be able to adhere. Not that this is a matter of woe but governments are obliged to respond to the dynamics of the situation and the government has responded to the dynamic situation,” Singh said.

Data released last month showed the central government’s fiscal deficit surged to 78 per cent of Budget estimates to Rs 2.79 lakh crore in April as tax revenues slumped on account of the nationwide lockdown. The Budget for 2020-21 has projected the fiscal deficit at Rs 7.96 lakh crore, or 3.5 per cent of GDP.

Stating that nothing suggests that India’s medium-term economic growth potential has been damaged, he said the commission would deliberate on which financial year is to be taken as ‘base year’ for the purpose for making projections for the the five-year period.

“Historically, the finance commissions for making projections has used the year in which they make the award as the base year. This year on account of extra ordinary factors using the current year in which we are as the base year have got many challenges,” Singh said. He said one of the suggestions by the advisory panel was to overlook the present year and choose the following year (2021-22) and look at the skewed likely second quarter results to make projection.

Thirdly, whether you take the average growth rate of the year before the pandemic as base year . “Each one of these are brought with their own methodological challenges and on probability of assumptions. We have received these views and we will have to debate them internally in the commission,” he said. Singh said growth momentum is likely to increase in the medium term and there would be sharp recovery next year. International agencies have projected growth to shrink by around 4-5 per cent this fiscal but recovery to 8-9 per cent next fiscal, mainly on account of low base.

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