NEW DELHI: The Fifteenth Finance Commission is considering requests to relax clauses in the Fiscal Responsibility and Budget Management Act (FRBM), which sets limits on state borrowings, since their revenues have been severely hit by the lockdown and tax collections through the rest of the year are likely to remain muted.
“One major demand that came out from states is to allow them more fiscal room. Many states have requested the invocation of the FRBM escape clause to allow their fiscal deficit to slip below 5 per cent,” a senior member of the economic advisory council of the panel said.
Members of the advisory council discussed for two days the impact of the Covid-19 pandemic on the fiscal health of the states and the Centre.
According to sources, members agreed that state revenues have already shrunk and now, post-pandemic, the devolution of taxes to states will come down considerably.
“The council members felt that the shortfall in tax and other revenues will be large due to subdued economic activity. Hence, fiscal response to the crisis should be much more nuanced,” the Finance Commission said.
”It is important not just to look at the size of fiscal response but also carefully at its design,” the Fifteeth Finance Commission added.
The two-day long meeting, chaired by N K Singh, was attended by all members and senior officials of the Commission.Singh, in the statement, added that the Commission will wait for Q4FY20 and Q1FY21 GDP data before finalising tthe recommendations.
If required, it will also revisit some of the recommendations in the areas of health, etc. The Advisory Council of the commission also felt that the magnitude of the impact of these developments on public finances is uncertain, but noted that it will certainly be significant.
Governments will have a substantial expenditure burden on account of health spending, support to the poor and other relief.
"The finances of the Central and State Governments need to be watched carefully. As of now, adequate provision for ways and means advances can largely help governments to manage cash-flow mismatches. As we move ahead, we need to think of options for financing the additional deficit. It is important to ensure that the State governments get access to adequate funds to undertake their fight against the pandemic," FFC said.