The 15th Finance Commission’s Report, recently presented in Parliament, provides a roadmap for the fiscal deficit and debt trajectory of both the Union and State Governments. The report lays out specific targets for fiscal deficits, borrowing limits for states, suggests enhanced scrutiny for Centrally Sponsored Schemes (CSS), and proposes a new Fiscal Responsibility and Budget Management (FRBM) framework.
Fiscal Deficit Targets
The report emphasized the need for fiscal consolidation to restore economic health. It recommends that the Union Government reduce its fiscal deficit to 4% of Gross Domestic Product (GDP) by 2025-26, a sizeable decrease from the current 6.8% in FY22. On the other hand, the fiscal deficit targets for States have been suggested at 4% of Gross State Domestic Product (GSDP) for 2021-22, 3.5% for 2022-23, and a steady 3% for the subsequent three years.
State Borrowing Ceilings
Stricter constraints on borrowing limits for States are proposed, relying on Article 293 of the Constitution. This article stipulates that State Governments operate under pre-approved borrowing limits, essentially creating budget constraints. The report suggests a net borrowing limit of 4% of GSDP for the fiscal year 2021-22, which should be lowered to 3.5% in the next fiscal year. From 2023-24 to 2025-26, this borrowing limit should be further maintained at 3% of the GSDP. However, the Commission also recommends allowing an extra 0.5% of GSDP borrowing for States if they initiate power sector reforms.
Monitoring of Centrally Sponsored Schemes
To ensure better utilization of funds, the report advises setting a minimum funding threshold for Centrally Sponsored Schemes (CSS). If allocations fall below this threshold, the responsible departments need to validate the scheme’s continuation. Furthermore, given that ongoing schemes’ lifecycles are now aligned with the Finance Commissions’ cycles, it is recommended that all CSSs be evaluated by a third-party within a specific timeframe.
New Fiscal Responsibility and Budget Management Framework
The report flags the necessity of a major restructuring of the Fiscal Responsibility and Budget Management Act (FRBM Act, 2003). It suggests a High-powered Inter-governmental Group should consider the timeline for defining and reaching debt sustainability. This high-powered group is also tasked with devising the new FRBM framework and observing its implementation. At the state level, the formation of independent public debt management cells is recommended for efficient handling of borrowing programs.