Recommending the roadmap for fiscal consolidation of states, the 13th Finance Commission, headed by Vijay Kelkar, has laid down revised targets for fiscal and revenue deficits to be achieved by 2014-15.
Calling zero revenue deficit as the golden rule underpinning the fiscal architecture of the Centre and states, the report has created separate roadmap for each state to reach the milestone. However, experts feel that the report ?is good (only) in parts.? M Govinda Rao, director of the National Institute of Public Finance and Policy, New Delhi, told FE, ?States would not be too happy as tax devolution is kept at just 32%. Though there are 10 different types of grants they have been given, the major concern will be implementation of GST. States are going to raise the issue of getting more flexibility (on grants) with the Centre with regard to the structure.?
Hoping 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, the panel has proposed that states incurring zero revenue deficit should continue till they eliminate the deficit by 2011-12.
Other states should eliminate revenue deficit by 2014-15, it said. However, the general category states that attained a zero revenue deficit or a revenue surplus in 2007-08 should achieve a fiscal deficit of 3% of gross state domestic product (GSDP) by 2011-12 and maintain the same thereafter, it suggested, adding that other general category states need to achieve 3% fiscal deficit by 2013-14.
All special category states get massive amount of revenue-gap grants whereas general category states hardly get any.
The commission has recommended all special category states with base fiscal deficit of less than 3% of GSDP in 2007-08 to incur a fiscal deficit of 3% in 2011-12. This means while Manipur, Nagaland, Sikkim and Uttarakhand should reduce their fiscal deficit to 3% of GSDP by 2013-14, J&K and Mizoram should limit their fiscal deficit to 3% of GSDP by 2014-15.
States are also required to amend or enact Fiscal Responsibility and Budgetary Management Acts to build in the fiscal reform path and put in place an independent monitoring mechanism.
While it has suggested states with large cash balances make efforts towards utilising these before resorting to fresh borrowings, it has called for the Centre to ensure uniformity in the budgetary classification code across all states.
The commission has prescribed that public expenditure needs to be discouraged. Besides, special category states should discontinue the practice of diverting plan assistance to meet non-plan needs, it said.
Suggesting sops for states, the panel has recommended that outstanding loans at the end of 2009-10 to the Centre and administered by ministries or departments other than ministry of finance, should be written off, subject to conditions prescribed.
Kelkar has also proposed that loans to states from National Small Savings Fund contracted till 2006-07 and outstanding at the end of 2009-10 should be reset at 9% interest, subject to conditions prescribed.
Apart from relevant reforms to be taken by the states, the panel has suggested that National Small Savings Scheme should be reformed into a market-aligned scheme.