Press Trust of India
New Delhi, April 6: The government Wednesday approved fiscal deficit target of 3 per cent for states, as recommended by the 14th Finance Commission for the 2015-20 period. FFC has adopted the fiscal deficit threshold limit of 3 per cent of Gross State Domestic Product (GSDP) for states. It has also provided for year-to-year flexibility for additional deficit. The Cabinet, chaired by Prime Minister Narendra Modi, gave approval to recommendations with two flexibility options, an official statement said.
FFC provided additional headroom to a maximum of 0.5 per cent over and above the normal limit of 3 per cent in any given year to states that have had a favourable debt-GSDP ratio and interest payments-revenue receipts ratio in the previous two years. “Since the year 2015-16 is already over, the states will not get any benefit of additional borrowings for 2015-16. However, the implications for the remaining period of FFC award, i.e., 2016-17 to 2019-20, would depend upon respective states’ eligibility based on the criteria prescribed by FFC,” the statement said.
Further, there is no financial implication for Centre as the borrowings are made by the respective states within the fiscal deficit limits laid down by Finance Commission and incorporated in FRBMA of the states. However, state will get additional space to raise borrowings which may result in much needed government expenditure for capital projects/ infrastructure. If a state is not able to fully utilize its sanctioned fiscal deficit of 3 per cent of GSDP in any particular year during the 2016-17 to 2018-19 of FFC award period, it will have the option of availing this un-utilized fiscal deficit amount only in the following year but within FFC award period.
Any additional borrowings availed beyond the state’s entitlements would be adjusted from net borrowing ceiling of the following year. As per analysts, this decision would incentivise states to take a more holistic view of their fiscal health, rather than the current relatively narrow focus on restricting the deficit below three per cent of GSDP.
The permission to carry forward any unutilized fiscal deficit amount to the following year (up to 2019-20) would impart flexibility to the states to time their borrowings in line with foreseeable expenditure spikes, for instance related to the pay commission awards. The cabinet decision gains significance in the backdrop of the states’ issuing bonds under the UDAY scheme for power distribution companies’ financial help. The decision will allow them to take on additional debt without stretching the deficit limits.
