Central and state governments will have to make substantial expenditure to tackle the economic downturn caused by the COVID-19 pandemic, and it will have an impact on their debt levels, the Committee of the 15th Finance Commission formed to Review the Fiscal Consolidation Roadmap of the General Government noted in its first meeting held Thursday.
By hiking the fiscal deficit limits for states, the Centre has enabled them to support their expenditure, even as linking of additional borrowing with reforms will help in medium-term debt management, the Commission’s Chairman N K Singh said. Stating that additional 2 per cent borrowing by states is a “symmetric” treatment of the Centre and states, he said the move augurs well for strengthening fiscal architecture. The Finance Commission has been mandated to work out the fiscal consolidation roadmap for the general government for the period 2021-22 to 2025-26.
As part of the economic package, the Centre on May 17 raised the borrowing limit of states from 3 per cent of gross state domestic product to 5 per cent in FY21, which will make available an additional Rs 4.28 lakh crore. However, part of the increased borrowing limit would be linked to specific reforms: universalisation of One Nation One Ration Card, ease of doing business, power distribution and urban local body revenues.
“The increase in debt will ratchet up state borrowing. Some reforms are necessary as this will help them in debt management in the medium term. It is in the interest of states … following a path of higher growth trajectory would be necessary,” Singh told reporters after the meeting of the fiscal consolidation committee.
As per the increased borrowing plan, a 0.5 per cent rise in borrowing by states, from 3 per cent to 3.5, would be unconditional. The next 1 per cent, i.e. up to 4.5 per cent, will be released in four tranches of 0.25 per cent and each of the tranches will be linked to a measurable and feasible reform. The last 0.5 per cent will be given once the milestones are achieved in at least three of the four reform conditions.
“The Committee noted that both Union and State Governments will have to make substantive expenditures to tackle the unprecedented situation caused by the pandemic. This, coupled with the downward pressure on economic activity caused by the pandemic, will impact the debt to GDP ratio of the General Government. Considering the uncertainty about emerging outlook, the magnitude of such impact is too early to be assessed now … ,” as per a statement issued by the Commission after the meeting.
The online meeting was attended by Singh, Ajay Jha and Anoop Singh, members of the Commission; Soma Roy Burman, Controller General of Accounts; S Krishnan, Additional Chief Secretary of Tamil Nadu; Anirudh Tiwari, Principal Secretary of Punjab; and analysts Sajjid Z Chinoy and Prachi Mishra, among others.
📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines