Union Cabinet approved recommendations of 14th Finance Commission on fiscal deficit targets
The commission adopted the fiscal deficit threshold limit of 3 per cent of Gross State Domestic Product (GSDP) for the States.Further, It was also provided a year-to-year flexibility for additional fiscal deficit to States.
Union Cabinet chaired by Prime Minister Narendra Modi on 6 April 2016 gave its approval to the Recommendations on Fiscal Deficit Targets and Additional Fiscal Deficit to States during Fourteenth Finance Commission (FFC) award period 2015-20 under the two flexibility options.
Important Recommendations of Fourteenth Finance Commission (FFC)
• The commission adopted the fiscal deficit threshold limit of 3 per cent of Gross State Domestic Product (GSDP) for the States.Further, It was also provided a year-to-year flexibility for additional fiscal deficit to States.
• It took the development needs and the current macro- economic requirement into account and provided additional headroom to a maximum of 0.5 per cent over and above the normal limit of 3 per cent in any given year to the States that have a favourable debt-GSDP ratio and interest payments-revenue receipts ratio in the previous two years.
• However, the flexibility in availing the additional fiscal deficit will be available to State if there is no revenue deficit in the year in which borrowing limits are to be fixed and immediately preceding year.
• The States will not get any benefit of additional borrowings for 2015-16 as the year is already completed. However, the implications for the remaining period of FFC award that is 2016-17 to 2019-20, would depend upon respective States eligibility based on the criteria prescribed by FFC.
• For the year 2016-17, the following fiscal parameters need to be taken into account before determining states eligibility for additional borrowings of 0.5 percent of GSDP recommended by FFC.
a) The revenue position of the State as per Finance Account for t-2 and as available from Revised Estimates for t-1. To illustrate, for the year 2016-17, the revenue position of the State for 2014-15 (actual as per Finance Accounts) and 2015-16 (RE) would be relevant.
b) The IP/TRR ratio and Debt/GSDP ratio based on the data as contained in Finance Account for t-2. To illustrate, for determining States’ eligibility for 2016-17, the IP/TRR ratio and Debt/GSDP ratio as disclosed in Finance Account of States for 2014-15 would be relevant.
• If a State is not able to fully utilise its sanctioned fiscal deficit of 3 per cent of GSDP in any particular year during the 2016-17 to 2018-19 of FFC award period, it will have the option of availing this un-utilised fiscal deficit amount (calculated in rupees) only in the following year but within FFC award period.
• For the purpose of calculating the unutilised borrowing space, the unutilised fiscal space as compared to FD limit of 3% of GSDP is to be reckoned. Similarly, any additional borrowings availed beyond the State’s entitlements shall be adjusted from Net Borrowing Ceiling of the following year.
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