Finance panel for ‘calibrated’ exit strategy from stimulus

Finance panel for ‘calibrated’ exit strategy from stimulus

New Delhi: The 13th Finance Commission has asked the government to adopt a “calibrated" strategy for withdrawing stimulus measures provided to spur the economy in the wake of the global economic crisis.

Although the Economic Survey has favoured providing further stimulus to the exports sector, the economic document also factors in the recommendations of the Finance Commission and said that the suggestions have to be taken on board in shaping the fiscal policy for 2010-11 and medium term.

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The Commission recommended “a calibrated exit strategy from the expansionary fiscal stance of 2008-09 and 2009-10."

Both the Survey and the Finance Commission’s report were tabled in Parliament on Thursday.

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The Commission also recommended increase in states share to 32% of Central tax proceeds from the current level of 30.5%.

“The share of states in net proceeds of shareable Central taxes shall be 32% every year for the period of the award (2010-11 to 2014-15)," said the Commission, headed by former finance secretary Vijay Kelkar.

The Commission also proposed that a new Fiscal Responsibility and Budgetary Management (FRBM) Act should have a space for relaxing targets of deficits on account of economic shocks.

“The FRBM Act needs to specify the nature of shocks that would require relaxation of the targets thereunder," the commission recommends.

The overall approach of the recommendations is to foster “inclusive and green growth promoting fiscal federalism," said the Survey.

The Commission’s recommendation assumes significance since the deficit targets in the previous legislation went awry after the government cut taxes and stepped up expenditure to provide stimulus to the economy.

The previous FRBM Act prescribed reduction of fiscal deficit to 3% of GDP and eliminate revenue deficit by 2008-09. However, fiscal deficit went up to 6.2% of GDP and is projected to widen to 6.8% this fiscal and revenue deficit rose to over 4.5% and is estimated to further go up to 4.8%.

The Commission recommended that the new FRBM Act should mandate the Centre to progressively reduce and eliminate the revenue deficit so that surplus emerges by 2014-15.

The Commission expected the states to get back to their fiscal correction path by 2011-12 and amend the FRBM Acts to that effect.

With the combined debt (of the states and the Centre) to GDP ratio shooting to 82 per cent in 2009-10 against previous Commission’s recommendations of 75%, the 13th Finance Commission suggested that the ratio be brought down to 68% by 2014-15 with the Centre’s ratio at 45%.

Terming the proposed Goods and Service Tax as “a game-changing tax reform measures, which will significantly contribute to the buoyancy of tax revenues", the Commission recommended Rs50,000 crore as compensation for the states for revenue loss on account of GST.