16th Finance Commission urges states to boost revenues, cut spending

State revenue deficits are being driven by committed and discretionary spending, the 16th Finance Commission has said, urging states to aggressively boost revenues and rationalise expenses.

 

The commission did not recommend revenue deficit grants to states or any sector-specific or state-specific grants. It said the NITI Aayog should study the functioning of the state finance commissions (SFCs) and publish a compendium of the good practices of the SFCs, and that all states must comply with the constitutional provisions pertaining to the regular constitution of SFCs on expiry of five years from the setting up of the previous SFC and ensure laying of action taken reports (ATRs) in the state legislature within six months of the submission of the SFC report as a prerequisite to claim their local body grant. It recommended that no local body should be allowed to spend more than 20 per cent of the untied allocation on the construction and maintenance of roads. Moreover, the untied grants should not be used for the payment of salaries or other establishment-related expenditure.

 

On disaster management, the 16th FC recommended that the accumulating balance under State Disaster Response Fund (SDRF) should be limited to the extent that if the unspent balance under SDRF exceeds the sum of the past three years’ annual allocation of SDRF, further releases may be temporarily withheld. The funds withheld will be released if the states’ balances reduce below the threshold of the past three years’ annual allocation, it said.

 

In its recommendations on macro and fiscal stability, the commission recommended that the states’ fiscal deficits continue to be capped at 3 per cent of their respective gross state domestic product (GSDP). It said states should completely discontinue the practice of incurring off-budget borrowings. “If, for any reason, off-budget borrowings are undertaken, there should be a framework for regular annual reporting, preferably as part of the budget,” the report said. It suggested that a framework should be put in place under which lending institutions periodically report the loans extended to state-owned entities where the government has the commitment to provide assistance for debt servicing. The 16th FC said that the Fiscal Responsibility and Budget Management (FRBM) Acts should require governments to report to the legislature if the deficit or debt limits prescribed under the legislative framework are breached. “We also recommend expanding the definition of fiscal deficit and debt to uniformly include all off-budget borrowings,” it stated.

 

In its recommendations in the power sector, the 16th FC asked the states to actively pursue privatisation of power distribution companies (discoms). To shield the private investor from the accumulated debt burden after discom takeover, a special purpose vehicle may be created by states to warehouse the accumulated debt, it said.