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15th Finance Commission Recommendations: Fiscal Consolidation

  • 03 Feb 2021
  • 3 min read

Why in News

Recently, the 15th Finance Commission’s Report was tabled in the Parliament. It provided range for the fiscal deficit and debt path of both the Union and States.

Key Points

  • Fiscal Deficit:
    • Target for Centre: It recommended that the Centre brings down its fiscal deficit to 4% of Gross Domestic Product GDP by 2025-26 against 6.8% in FY22.
    • Target for States: For states, it recommended fiscal deficit at 4% of Gross State Domestic Product (GSDP) in 2021-22, 3.5% in the following year and 3% for the next three years.
  • Borrowing Ceilings for States:
    • Because of Article 293 of the Constitution, State Governments operate under borrowing limits and, hence, budget constraints, approved by the Union Government.
    • The normal limit for net borrowing may be fixed at 4% of Gross State Domestic Product (GSDP) in 2021-22, 3.5% in 2022-23 and be maintained at 3% of GSDP from 2023-24 to 2025-26.
    • An additional borrowing of 0.5% of GSDP to be allowed to the States in case they meet the criteria for power sector reforms.
  • Better Monitoring of Centrally Sponsored Scheme (CSS):
    • A threshold amount of annual appropriation should be fixed below which the funding for a CSS may be stopped.
      • Below the stipulated threshold, the administration department should justify the need for the continuation of the scheme.
    • As the life cycle of ongoing schemes has been made co-terminus with the cycle of Finance Commissions, third-party evaluation of all CSSs should be completed within a stipulated time frame.
  • New FRBM Framework:
    • The Fiscal Responsibility and Budget Management Act (FRBM Act, 2003) needs a major restructuring and recommended that the time-table for defining and achieving debt sustainability may be examined by a High-powered Inter-governmental Group.
      • This High-powered Group can craft the new FRBM framework and oversee its implementation.
    • State Governments may explore formation of independent public debt management cells which will chart their borrowing programme efficiently.

Source: PIB

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