New Delhi: The 13th Finance Commission (TFC) has recommended a return to fiscal consolidation and reform in expenditure management. It has also suggested the Centre offer states a share of revenue raised from levies such as cesses and surcharges, according to people familiar with the report.

New goals: Vijay Kelkar.

TFC’s recommendations, finance minister Pranab Mukherjee said, “would be getting reflected in the 2010-11 budget".

Separately, TFC chairman Vijay Kelkar told reporters that the commission had been asked to suggest a new path of fiscal consolidation. The report had recommended the fiscal path for the next five years (2010-15), he said.

The recommendations come in a year in which the fiscal deficit is estimated at a 16-year high. The deficit is set to widen to 6.8% of India’s gross domestic product in the year to March, as government spending balloons. “We shall have to strike a balance between the requirements of the economy and the capacity of the economy to bear this level of fiscal deficit," Mukherjee told reporters in New Delhi.

TFC recommended that the Union government offer the states a share of the revenue raised from cesses and surcharges, according to people familiar with the report, who didn’t want to be named. Such revenue now goes in its entirety to the coffers of the Centre.

As part of the package of recommendations on fiscal consolidation, TFC also suggested that the Centre compensate state-owned oil marketing companies, which subsidize retail purchase of petroleum products, through a transparent cash payment instead of oil bonds, which do not clearly show up in the government’s fiscal deficit calculations.

The government has already begun the process of cleaning up the manner in which it compensates oil marketing companies. In the current fiscal, the finance ministry is examining the possibility of paying such companies cash to offset the subsidy they have extended retail customers.

The finance commission is a statutory body appointed by the president to generally suggest division of revenue between the Union government and the states. Each commission is given unique terms of reference to guide its study and recommendations.

The Kelkar TFC was constituted in 2007. In August 2008, its terms of reference were widened to “suggest a suitably revised road map with a view to maintaining the gains of fiscal consolidation through 2010 to 2015."

According to the people familiar with the report, the recommendations for fiscal consolidation include one to offer states a debt waiver package as an incentive to further improve their fiscal performance.

The last commission had also suggested a debt waiver for states, which was subsequently implemented, as part of a process to nudge them towards fiscal consolidation.

In September 2008, state finance ministers had made a pitch to TFC for debt relief. The essence was that it recommend a reduction on the interest rate on loans given to states out of small savings and write off a part of the debt.

TFC’s terms of reference asked it to recommend the extent of Central taxes which needed to be passed on to states, keeping in mind that the goods and services tax (GST) was proposed to be rolled out on 1 April.

The implementation of GST is expected to be delayed, the finance minister said last week.

According to the people familiar with the development, TFC has assumed revenue neutrality. The recommendations on sharing Central taxes have been made assuming a switch to GST would not result in a fall in tax revenue from the current level of collections. A related assumption made by TFC is that the growth rate in tax revenue recorded in the recent past would be the trend rate going forward.

The main opposition Bharatiya Janata Party said states should get more revenue.

“BJP-ruled states have been demanding a greater share of revenue since a lot of Central schemes are to be funded by the state exchequer," Prakash Javadekar, spokesperson for the principal opposition party, told Mint.

While the precise percentage of devolution of Central taxes to states as recommended by TFC was unavailable, the states in their pitch last year had asked for “at least 50%, including all gross Central tax revenue and all Central surcharges and cess in the divisible pool."

PTI, Bloomberg and Mint’s Santosh Joy contributed to this story.