Finance panel may set states’ fiscal compass

To aid states meet their debt targets by end-FY25

The 15th Finance Commission, whose composition and terms of reference (TOR) are expected to be announced by the end of this year, may be tasked with recommending a road map for states to meet their debt targets by end-FY25. The Commission, like the 14th before it, will have to recommend on financial devolution, through the divisible pool, from the Centre to the states and among the states. These will be its main TOR as mandated by Article 280 of the Constitution.

The Commission may also be tasked with recommending the debt-gross state domestic product levels of each state and combined debt-gross domestic product (GDP) levels for all states. Just as the Fiscal Responsibility and Budget Management panel has suggested a road map for the Centre toreduce its debt-GDP ratio to 40 per cent by FY23, the Commission may be recommending a road map for states, Business Standard has learnt. The recommendations of the Commission will be applicable from the fiscal year 2020 to 2025. Sources say that the draft TOR have been drawn up and these could be tweaked.

Additionally, sources said that there was a major debate going on in the higher levels of the government on whether the Commission should use the 2011 Census for its work. Till the 14th Finance Commission, the 1971 Census was used, though it recommended distributing grants to states for local bodies using the 2011 Census. “If the 15th Finance Commission is recommending a fiscal road map for states, it will have to look at a lot of parameters, including size, population, migration, private and public investment, social spending, education, health, mortality, among others,” said an official.

Also, while the Commission would be tasked with studying the impact of the nationwide goods and services tax (GST), it might treat the GST as part of the divisible pool and not as a separate issue.

As reported earlier, the Commission may be given the job of suggesting ways to provide for more fiscal space and resources for states to deal with agricultural crises. Five states have announced farm-loan waivers, namely Uttar Pradesh, Punjab, Karnataka, Telangana, and Maharashtra, totalling roughly around ~2 lakh crore. This has prompted concerns about their fiscal health and resources, which are already stretched due to issuance of bonds under the restructuring of distribution companies.

Also, former parliamentarian and former revenue and expenditure secretary N K Singh is being considered for the position of chairman of the Commission and has emerged a front runner.