15th Finance Commission to set up panel to examine fiscal, debt situation

The panel may include or seek inputs from former RBI Governor Urjit Patel, former chief economic advisor Arvind Subramanian, Sajjid Chinoy of the PM-EAC, Rathin Roy, among others

The Fifteenth Finance Commission (15th FC) will set up a panel later this month to examine the fiscal and debt situation of the Centre and states and present a road map, on the lines of the erstwhile Fiscal Responsibility and Budget Management panel, the Commission’s Chairman N K Singh said on Wednesday.

The panel may include or seek inputs from former Reserve Bank of India Governor Urjit Patel, former chief economic advisor Arvind Subramanian, Sajjid Chinoy of the Prime Minister’s Economic Advisory Council, Rathin Roy of National Institute of Public Finance and Policy, and Prachi Mishra of Goldman Sachs, among others.

“One of the terms of reference of the Commission is to address the issue of general government, the consolidated fiscal deficit and debt and so on. So, after my meeting with the 15th FC’s economic advisory council on February 13, I intend to constitute a committee under my chairmanship, since I had the chairmanship of the FRBM Committee,” Singh said.

Singh said the panel will include representatives from the Controller General of Accounts, the Indian Civil Accounts Service, state expenditure departments, and other central and state bodies, as well as domain experts. 

“The aim will be to come up with a report to address the terms of reference given to the Commission,” said Singh.

The terms of reference say: “The Commission shall review the current status of the finance, deficit, debt levels, cash balances and fiscal discipline efforts of the Union and the states, and recommend a fiscal consolidation roadmap for sound fiscal management, taking into account the responsibility of the central government and state governments to adhere to appropriate levels of general and consolidated government debt and deficit levels, while fostering higher inclusive growth in the country, guided by the principles of equity, efficiency and transparency.”

The panel will submit its report to the 15th FC, which may include those recommendations in its second report, expected to be submitted in October, and will make recommendations for the period financial year 2021-22 (FY22) to FY26.

“The panel will see whether we are compliant with terms of reference. One of the overarching issues that the Commission is expected to weigh in on is the path, issues and factors of the debt and fiscal deficit of Centre and states to be compliant with the FRBM Act,” Singh said.

The panel, and hence the 15th FC, is also expected to take a look at Article 293(3) of the Constitution, which says a state cannot raise any loan without the Centre’s consent if there is an outstanding loan made by the Centre to the state.

“I did not touch upon this in the FRBM Committee because that mostly focused on the Centre’s finances,” Singh said. When asked if he would invite his former colleagues from the FRBM Committee to be part of the panel, Singh replied in affirmative.

“Roy is here in Delhi, Subramanian is abroad, but has views on fiscal consolidation. I might want to hear Patel, and some experts like Chinoy and Mishra,” Singh said.

The FRBM Committee comprised of Singh, former finance secretary Sumit Bose, Patel, Subramanian, and Roy. The committee, which submitted its report to former finance minister Arun Jaitley before the 2017-18 Budget, had recommended a fiscal deficit target of 2.5 per cent of gross domestic product, and revenue deficit of 0.8 per cent for fiscal year 2022-23.

Other recommendations included setting up a fiscal council and giving the government tightly defined escape clauses to enable any deviation from the roadmap. Subramanian had drafted a dissent note, which was part of the panel’s report.

Finance Minister Nirmala Sitharaman used the escape clauses to revise the budgeted fiscal deficit target of 2019-20 and the medium-term forecast for 2020-21 by 0.5 percentage points each. The Centre now sees fiscal deficit at 3.8 per cent of GDP for FY20 and 2.5 per cent for FY21.

In its first report – for FY21 – the 15th FC has recommended the creation of an overarching legal fiscal framework to improve and overhaul budgeting at the central and state level, as well as provide greater budgetary transparency.

Mirroring the FRBM Act, this would also define the roles and responsibilities of key stakeholders, as well as the budgeting, accounting, internal control and audit standards to be followed at all levels of government. The first report was tabled in Parliament on February 1, along with the Budget.

The Road Ahead

• Committee may recommend fiscal road map for Centre and states
• May include or take inputs from Urjit Patel, Arvind Subramanian, and others
• Will have representatives from CGA, ICAS
• Panel will submit its report to the 15th Finance Commission