Low growth assumption by 15th Finance Commission may lead to smaller share of tax revenues
India’s nominal Q1 GDP growth stood at a meagre 8% while the budget assumes nominal GDP growth at 11.5%
New Delhi: State governments may be staring at a serious resource crunch in the five years beginning 2020-21, as the current economic downturn may force the 15th Finance Commission (FFC) to assume low nominal GDP growth, which would mean a smaller share of tax revenues for states.
However, since the Centre has the power to impose cess, it may have more legroom to deal with the situation than the states.
Nominal GDP is real GDP calculated at market prices, taking inflation into account. Since inflation has been within the Reserve Bank of India’s comfort level of 3-4%, lower real GDP growth will bring down the overall nominal GDP number.
India’s nominal GDP growth in the June quarter stood at a meagre 8%—the lowest in the current GDP series—while the budget for the current fiscal assumes nominal GDP growth at 11.5%.
After meeting the FFC’s advisory council comprising leading economists, ahead of submitting his report to the government on 30 November, FFC chairman N.K. Singh said post-budget, evidence has emerged suggesting that nominal GDP may be lower than assumed.
“Nominal GDP growth looks problematic. The commission is not obliged to accept the numbers of nominal GDP as submitted to the commission by the central government memorandum, or as contained in the medium-term fiscal policy statement. The commission is duty-bound under the constitution to arrive at its own judgement. How we exercise that is entirely up to us," he added.
N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, said unless the commission reviews the fiscal deficit and debt-to-GDP ratios for the Centre and states, both of them may not have enough resources to meet their committed expenditures. “In such a case, they have to squeeze their expenditure, which may not be ideal at a time the economy is slowing," he added.
India’s economy is currently undergoing its worst phase in more than six years, and many economists believe it is a structural slowdown. While real GDP in Q1 grew by 5%, manufacturing output almost came to a standstill, growing at just 0.6%. India’s automobile sector contracted for the 10th consecutive month in August, signalling a deeper problem in demand conditions.
When asked about his assessment of the current macro-economic situation, Singh said: “The government is acting with alacrity which is appropriate to address the situation. There is no lack of either intent or determination in implementing measures."
On whether the government can announce a fiscal stimulus package, Singh said: “Where is the fiscal space?" Asked whether the government can invoke the so-called “escape clause" available in the Fiscal Responsibility and Budget Management Act, as originally recommended by a committee headed by him, Singh said the Centre will have to take a call.
The escape clause allows the government deviation of up to 0.5 percentage points of GDP, based on triggers that include far-reaching structural reforms in the economy having unanticipated fiscal implications, acts of war, and farm distress.
The FFC has to submit its report by end-November. However, Singh said it is yet to receive the reference from the President on the change in the status of Jammu and Kashmir after its bifurcation last month. J&K and Ladakh will become two separate Union territories from 31 October. Asked how much time he will get to factor in the change to J&K’s status, Singh said: “There will be zero window. The reference can come to us only in the first week of November. They can’t make a reference to us on a non-existent territory."