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Govt approves recommendations of FFC on fiscal deficit targets

07 Apr 2016 Evaluate

Giving some flexibility to states, the government has approved Fiscal Deficit Targets and Additional Fiscal Deficit to States during Fourteenth Finance Commission (FFC) award period 2015-20 under the two flexibility options recommended in para 14.64 to 14.67 of its report. FFC has adopted the fiscal deficit threshold limit of 3 percent of Gross State Domestic Product (GSDP) for states. Besides the fiscal deficit threshold limit of 3 per cent of GSDP for states, the Commission has also provided for year-to-year flexibility for additional deficit. For the year 2016-17, according to FFC report, fiscal parameters that need to be taken into account before determining states eligibility for additional borrowings of 0.5% of GSDP recommended by FFC are the revenue position of the State as per Finance Account for t-2 and as available from Revised Estimates for t-1.

Taking into account the development needs and the current macro-economic requirement, the Union cabinet provided additional headroom to a maximum of 0.5 percent over and above the normal limit of 3 percent in any given year to the states that have a favourable debt-GSDP ratio and interest payments-revenue receipts ratio in the previous two years. Those states that have a debt-GSDP ratio of less than 25% and interest payments-revenue receipts ratio less than 10% in the previous two years will be eligible to raise their fiscal deficits.

The approval not only incentivise fiscal discipline, it also empowers states to prioritize their development spending-consistent with the implicit thinking of the FFC that one size does not fit all and that states are mature enough to competently manage their own fiscal needs. Also, there is no financial implication for Government of India as the borrowings are made by the respective State Governments within the fiscal deficit limits laid down by Finance Commission and incorporated in FRBMA of the States.

Further, if a state is not able to fully utilise its sanctioned fiscal deficit of 3 percent of GSDP in any particular year during the 2016-17 to 2018-19 of FFC award period, it will have the option of availing this un-utilised fiscal deficit amount only in the following year but within FFC award period. Any additional borrowings availed beyond the state's entitlements would be adjusted from Net Borrowing Ceiling of the following year.

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