States want to spend more, ask for higher FRBM limit

Call follows FinMin report advocating expansionary fiscal policy

By: ENS Economic Bureau | New Delhi | Published:December 27, 2014 1:41 am
Finance Minister Arun Jaitley with Minister of State Jayant Sinha in New Delhi on Friday. (Source: Express photo by Prem Nath Pandey) Finance Minister Arun Jaitley with Minister of State Jayant Sinha in New Delhi on Friday. (Source: Express photo by Prem Nath Pandey)

Just days after a finance ministry report proposed moving to an expansionary fiscal policy, a majority of states too have called to boost spending on infrastructure that would help spur growth and have also sought a higher limit than mandated to borrow more funds from the market.

At a pre-Budget meeting that was called by Union finance minister Arun Jaitley on Friday, states also  asked the Centre to decentralise centrally sponsored schemes and address concerns on revenue loss before the roll out of the goods and services tax.

“All states want more expenditure on infrastructure as it is important to improve growth. To finance their own spending on infrastructure, states have also suggested that they should be allowed to borrow from institutions,” Jaitley told reporters after the four hour long meeting, adding that states have also sought an enhanced Fiscal Responsibility and Budget Management Act (FRBM) cap to ensure more liquidity in the market.

At the meeting, Jaitley said the biggest challenge before the country was to increase the growth rate as it would boost both economic activities and revenue collections but also stressed that fiscal discipline can not be compromised. “As per different estimates, our growth rate would be above 6 per cent during 2015-16,” he said.

The suggestions by states is in line with the proposal to move to an expansionary fiscal policy to spur economic growth that was included in the Mid-Year Economic Analysis 2014-15.

At present, the Centre is expected to meet a fiscal deficit target of 4.1 per cent of the GDP in 2014-15 and 3.6 per cent in 2015-16. Meanwhile, states are expected to maintain their gross fiscal deficit or annual borrowings at 3 per cent of the gross state domestic product.
Sources said that many of the states such as Tripura said that the fiscal consolidation roadmap should be reviewed with more discussions with states.

“The borrowing limit of three per cent of GSDP is computed taking factor cost into consideration whereas it should be allowed at GSDP at market price. Besides, states should be allowed to raise additional borrowings the years following high GSDP growth,” said Rajpal Singh Shekhawat, minister for urban development and housing and local government in Rajasthan.

States also called for removing the distinction between Plan and non-plan expenditure and limiting the number of centrally sponsored schemes while giving states the leeway to allocate spends on them.

Further, they demanded that the Union Budget 2015-16 should make adequate provisions for central sales tax (CST) compensation for the early introduction of GST.

“Nearly all states said that the formula reflected in the Constitutional Amendment Bill on GST is very balanced,” Jaitley said, adding the Centre would consider their suggestions during the Budget preparations.

However, AIADMK ruled Tamil Nadu is understood to have opposed introduction of the Constitutional Amendment Bill for GST in the Parliament without consensus on many critical issues such as revenue neutral rates and bands, compensation methodology and thresholds. “This is not acceptable to us,” said state chief minister O Panneerselvam at the meeting.

Telangana sought provision in the Budget for compensation of revenue loss suffered by states due to reduction in CST.

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