Economists highlight need for reducing centre, state debt; call for new revenue means

New Delhi: Eminent economists have highlighted the need for consolidation of debt by centre and states, suggesting that the governments look at fresh avenues to garner revenue, like mines auction, along with expenditure reduction.

During their meeting with the 15th Finance Commission Wednesday, 12 economists also made a case for improving the quality of budgeting, such that governments should not budget for a low fiscal deficit, knowing fully well that it cannot be achieved.

Since the terms of reference of the 15th Finance Commission says that the 2011 census on population would be used to determine the allocation of resources to India's states, instead of decades-old practice of taking 1971 census, the economists also suggested instituting an "incentive structure" in devolution taking into account that the proportion of elderly population is becoming significantly different across states.

On the issue of state government debt, the economists said states are at vastly different stages of debt consolidation and reaching the Fiscal Responsibility and Budget Management (FRBM) targets would involve an "extremely difficult adjustment" path for a few states.

"However, it is important that the union government and state governments, as a whole, to consolidate their debt position. According to some economists, expenditure adjustments alone cannot bring about the required adjustment; fresh revenue-raising efforts should also be made. Proceeds from auctioning of mines could be a potential source of revenue," the economists said during the meeting in Mumbai according to an official statement.

The N K Singh panel to review the then FRBM rules had in 2017 recommended a debt-to-GDP ratio of 40 per cent for the central government and 20 per cent for combined state governments. It also suggested a glide path to bring down fiscal deficit of 2.5 per cent of Gross Domestic Product (GDP) by 2022-23.

"The quality of budgeting needs to improve. Governments should not budget for a low fiscal deficit, knowing fully well that it cannot be achieved. Projections of revenues from GST is tricky, but not impossible if one can work with the available data," the economists said.

The government had missed the budgeted fiscal deficit target of 3.3 per cent in 2018-19 and revised it to 3.4 per cent.

Deviating from the path laid down in the FRBM Act, the government has pegged the fiscal deficit for current financial year at 3.4 per cent of GDP, as against the original target of 3.1 per cent, largely driven by increased spending to provide income support to small farmers and tax rebates in an election year.

There are indications that the fiscal deficit to gross state domestic product (GSDP) ratio of the states taken as a whole is gradually declining after the spike seen in 2015-16 and 2016-17, it added.

The economists also highlighted the need to adopt a total view on the borrowing requirements of the public sector as a whole, encompassing off-budget transactions, borrowings of the public sector undertakings and contingent liabilities of both the union and state governments.

"This is important from many angles, including debt sustainability, fiscal transparency and proper coordination of fiscal and monetary policies," the statement said.

The economists also said that whether the increased tax devolution by the 14th Finance Commission has led to improvements in the social spending of state governments needs to be "carefully examined".

"There is possibly a mismatch between the demand and supply of state development loans, which can affect the cost of borrowings of state governments in the next five years. Given the maturity profile of state loans, there can also be repayment pressure on these loans during the period of the 15th Finance Commission," the economists said.

The Finance Commission is set up every five years to suggest among other things the method of devolution of central tax revenue between the centre and the states.

The 15th Finance Commission, chaired by N K Singh, will make recommendations by October 2019 for five years commencing April 1, 2020.

During the meeting, economists also made suggestions regarding the formula for "horizontal devolution" of central taxes among states and the provision of grant-in-aid to the state governments.

"These suggestions related to weight of income distance in the devolution formula, the need to consider the quality of forests in addition to its quantity and the need to consider and incentivise human development through a system of grants or tax devolution," the economists said.

Some also urged that intra-state inequality should be looked into by the commission while suggesting formula for devolution and urged it to consider reinstating the system of specific-purpose grants to ensure development of social sectors and other sectors that require hand-holding.

"Finance Commission may also consider the need for achieving comparable service delivery standards across the country as its guiding principle," they said.

A suggestion was also made for the Finance Commission to consider giving priority to the development of a very robust statistical system in the country in its recommendations.

Economists present at the meeting were Rupa Rege Nitsure, Saugata Bhattacharya, Prachi Mishra, Samiran Chakraborty, Pranjul Bhandari, Ashu Suyash, Anjan Deb Bose, Naresh Takkar, Soumya Kanti Ghosh, Ajit Ranade, Prof. Ashima Goyal and S L Shetty.