The Centre is expected to show a 5.7% fiscal deficit in Budget 2010-11 on Friday, according to a report of the 13th Finance Commission. Released a day before finance minister Pranab Mukherjee makes his Budget speech in the Lok Sabha, the report also strongly pitched for introducing a goods & services tax (GST), while at the same time advising the Centre not to do so piecemeal.
There have been reports that Mukherjee?s ministry may introduce GST at the Centre while building a consensus for it with the states. Cesses and surcharges should be reviewed by the government, noted the report of the commission, which decides allocation of tax revenues between the Centre and states.
The finance minister told reporters he has accepted the panel?s recommendations. ?Despite the fiscal stress being faced by the Centre, the government has accepted the major recommendations, keeping in mind the larger interests of the federal polity,? he said.
The commission is a constitutional body appointed every five years. Headed by Vijay Kelkar, a former adviser to the finance minister and one of India?s foremost economists and bureaucrats, it has suggested, as reported by FE earlier, that 32% of the taxable pool should go to states, from the current 29.5%.
Combined with the buoyancy in tax revenues as economic growth picks up, states will be richer by at least Rs 32,000 crore. In addition, it has also recommended giving them grants totalling Rs 3.19 lakh crore over the next five years. Other goodies include resetting at a lower 9% rate of interest loans taken by states from the Small Savings Fund until 2006-07.
As India moves onto a double-digit growth path, the commission?s award will decide how the states and Centre arrange their finances until 2014-15. Mukherjee acknowledged they both ?will benefit from these recommendations?. Kelkar?s far-reaching suggestions include freeing the disinvestment receipts of the Centre from the straitjacket of being sequestered in the National Investment Fund. He said the money should go to the Consolidated Fund of India, which the finance ministry can dip into.
But experts like Govinda Rao, director at Delhi-based National Institute of Public Finance & Policy, described the report as only ?good in parts?. According to him, states could approach the Centre for flexibility in the fiscal reform road map. The implication of the 13th Finance Commission award is that states will borrow less from the markets. Commenting on the additional space given to states to borrow this fiscal in the wake of the economic downturn, Kelkar said no state should be allowed to borrow more than the yearly targets from banks even if they face sudden shocks.