The 13th Finance Commission (TFC) has recommended a
return to fiscal consolidation and reform in expenditure
management. It has also suggested the Centre offer
states a share of revenue raised from levies such as
cesses and surcharges, according to people familiar with
the report. New goals: Vijay Kelkar.
TFC, a statutory body tasked with suggesting ways in
which taxes should be shared between the Centre and
states and drawing up a road map towards fiscal
consolidation, on Wednesday presented its report to
President Pratibha Patil. The report has not been placed
in the public domain yet, but is likely to be presented
in Parliament just ahead of the budget announcement in
February. TFC's recommendations, finance minister Pranab
Mukherjee said, "would be getting reflected in the
2010-11 budget". Separately, TFC chairman Vijay Kelkar
told reporters that the commission had been asked to
suggest a new path of fiscal consolidation. The report
had recommended the fiscal path for the next five years
(2010-15), he said. The recommendations come in a year
in which the fiscal deficit is estimated at a 16-year
high. The deficit is set to widen to 6.8% of India's
gross domestic product in the year to March, as
government spending balloons. "We shall have to strike a
balance between the requirements of the economy and the
capacity of the economy to bear this level of fiscal
deficit," Mukherjee told reporters in New Delhi. TFC
recommended that the Union government offer the states a
share of the revenue raised from cesses and surcharges,
according to people familiar with the report, who didn't
want to be named. Such revenue now goes in its entirety
to the coffers of the Centre. As part of the package of
recommendations on fiscal consolidation, TFC also
suggested that the Centre compensate state-owned oil
marketing companies, which subsidize retail purchase of
petroleum products, through a transparent cash payment
instead of oil bonds, which do not clearly show up in
the government's fiscal deficit calculations. The
government has already begun the process of cleaning up
the manner in which it compensates oil marketing
companies. In the current fiscal, the finance ministry
is examining the possibility of paying such companies
cash to offset the subsidy they have extended retail
customers. The finance commission is a statutory body
appointed by the president to generally suggest division
of revenue between the Union government and the states.
Each commission is given unique terms of reference to
guide its study and recommendations. The Kelkar TFC was
constituted in 2007. In August 2008, its terms of
reference were widened to "suggest a suitably revised
road map with a view to maintaining the gains of fiscal
consolidation through 2010 to 2015."According to the
people familiar with the report, the recommendations for
fiscal consolidation include one to offer states a debt
waiver package as an incentive to further improve their
fiscal performance. The last commission had also
suggested a debt waiver for states, which was
subsequently implemented, as part of a process to nudge
them towards fiscal consolidation. In September 2008,
state finance ministers had made a pitch to TFC for debt
relief. The essence was that it recommend a reduction on
the interest rate on loans given to states out of small
savings and write off a part of the debt.TFC's terms of
reference asked it to recommend the extent of Central
taxes which needed to be passed on to states, keeping in
mind that the goods and services tax (GST) was proposed
to be rolled out on 1 April. The implementation of GST
is expected to be delayed, the finance minister said
last week. According to the people familiar with the
development, TFC has assumed revenue neutrality. The
recommendations on sharing Central taxes have been made
assuming a switch to GST would not result in a fall in
tax revenue from the current level of collections. A
related assumption made by TFC is that the growth rate
in tax revenue recorded in the recent past would be the
trend rate going forward. The main opposition Bharatiya
Janata Party said states should get more revenue.
"BJP-ruled states have been demanding a greater share of
revenue since a lot of Central schemes are to be funded
by the state exchequer," Prakash Javadekar, spokesperson
for the principal opposition party, told Mint. While the
precise percentage of devolution of Central taxes to
states as recommended by TFC was unavailable, the states
in their pitch last year had asked for "at least 50%,
including all gross Central tax revenue and all Central
surcharges and cess in the divisible pool.
