Fiscal Discipline for States

Cabinet approves fiscal deficit threshold limit of 3% of Gross State Domestic Product for states.

Published: 07th April 2016 05:05 AM  |   Last Updated: 07th April 2016 05:05 AM   |  A+A-

NEW DELHI:  In an effort to give some flexibility to the States, the Union Cabinet on Wednesday approved the recommendations  of the 14th Finance Commission (FFC) for the 2015-20 period with two flexibility options.

The government approved a fiscal deficit target of 3 per cent for states, as recommended by the FC for the 2015-20 period. Besides the fiscal deficit threshold limit of 3 per cent of Gross State Domestic Product (GSDP) for states, the Commission has also provided for year-to-year flexibility for additional deficit.

It has 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 states that have had a favourable debt-GSDP ratio and interest payments-revenue receipts ratio in the previous two years.

Since the year 2015-16 is already over, the States will not get any benefit of additional borrowings for 2015-16, an official statement said.

Madan Sabnavis, chief economist at CARE Ratings said, “Mostly the states are firmly compliant with their borrowing targets. In normal course, the additional 0.5% is provided to some states approved by the government.” 

Further, there is no financial implication for the Central government as the borrowings are made by the respective states within the fiscal deficit limits laid down by the Finance Commission and incorporated in FRBMA (Fiscal Responsibility and Budget Management Act) of the states. However, states will get additional space to raise borrowings that may result in much-needed government expenditure for capital projects/ infrastructure.

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 only in the following year but within FFC award period.

Madan further said that “there are many states who consciously decide not to exceed even 2 per cent of the fiscal deficit target. Hence, this will not have much financial impact.”

Since the year 2015-16 is already over, the States will not get any benefit of additional borrowings for 2015-16. However, the implications for the remaining period of FFC award, i.e., 2016-17 to 2019-20, would depend upon respective States’ eligibility based on the criteria prescribed by FFC

— An Official statement

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