Home >News >India >Finance Commission's 2-day meet on fiscal stimulus starts Thursday
With oil prices plunging and a nationwide lockdown reducing consumption, states’ tax revenues are set to fall. (Photo: AP)
With oil prices plunging and a nationwide lockdown reducing consumption, states’ tax revenues are set to fall. (Photo: AP)

Finance Commission's 2-day meet on fiscal stimulus starts Thursday

  • The FCC will discuss the implications of the covid-19 pandemic on economic growth in this fiscal year and the next, and the stimulus required to shore up the economy
  • The meeting will also discuss possible assumptions in tax buoyancy during the two-year period

The Economic Advisory Council of the 15th Finance Commission (FFC) will hold a two-day virtual meeting starting Thursday to discuss the implications of the covid-19 pandemic on economic growth in this fiscal year and the next, and the stimulus required to shore up the economy.

The meeting, which will be presided over by FFC chairman N.K. Singh, will also discuss possible assumptions in tax buoyancy during the two-year period.

The meeting comes at a time the finance ministry is deliberating a stimulus package to stem job losses as a result of the ongoing lockdown by helping companies stay afloat. While the Centre has extended the lockdown till 3 May, from Monday onwards it allowed the resumption of some economic activities, mostly in rural India. Most forecasters have significantly reduced India’s growth estimate for FY21, with the International Monetary Fund pegging it at 1.9%.

The meeting will be attended by the members of the FFC and five members of the council, including chief economic adviser in the finance ministry Krishnamurthy Subramanian, prime minister’s economic advisory council member Sajjid Z. Chinoy, and Prachi Mishra, Neelkanth Mishra and Omkar Goswami.

Earlier on 7 April, the FFC also reviewed the emerging economic scenario and uncertainties about macroeconomic variables. “The issue of state finances being under strain and representation received by the FC was also reviewed. It was decided to work on alternative scenarios and on other parameters notwithstanding the current uncertainties," FFC said in a series of tweets.

While states have performed better than the Centre, remaining well within their FRBM (fiscal responsibility and budget management) limit of 3% of gross state domestic product (GSDP), the combined fiscal deficit of states has started rising since 2017-18, touching 2.9% of GSDP in 2018-19, which is expected to hit the upper ceiling of 3% of GSDP in 2019-20, according to projections by rating agency Moody’s.

States at the forefront of the battle against the escalating covid-19 pandemic in the country are staring at fiscal crises with shrinking revenues and rising demand for resources. With oil prices plunging and a nationwide lockdown reducing consumption, their own tax revenue is set to fall. State governments have been making representations to both the FFC and the Centre to allow them to borrow more in FY21 to meet their financing needs. However, the market borrowing cost for the states has risen significantly due to front-loading of borrowing by many states.

Pronab Sen, a former chief statistician of India, said under the current circumstances, the Centre should borrow from the market and lend it to states at 50 basis points higher cost than the market interest rate. “This has been the norm until the FRBM came into place. The Centre and the Finance Commission need to think of this formula to decrease borrowing cost of states," he added.

The FFC has assumed a nominal GDP growth and buoyancy for the Centre’s gross tax revenues at 11% and 1.14%, respectively, for FY21 which most analysts consider as overestimations.

This has implications for the projected share of the central taxes for states in the current fiscal and the estimation of revenue deficit grants for individual states.

Madan Sabnavis, chief economist at Care Ratings, said the Centre has to ensure fiscal transfers to states on time through borrowing or by relaxing FRBM norms for two years. “Centre can contribute to state schemes otherwise. But for sure we need to be flexible with FRBM this year," he added.

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