THE FOURTEENTH FINANCE COMMISSION RECOMMENDATIONS

ON FISCAL ENVIRONMENT AND

FISCAL CONSOLIDATION ROADMAP
The Fourteenth Finance Commission of India was a finance commission constituted
on 2 January 2013. The commission's chairman was former Reserve Bank of India
Governor Y. V. Reddy.

FISCAL ENVIRONMENT AND FISCAL CONSOLIDATION ROADMAP

INTRODUCTION

Terms of reference required Commission to review the state of finances, deficit and
debt levels of Union and State, keeping in view recommendation of Thirteenth Finance
Commission regarding fiscal consolidation roadmap and suggest measures for
maintaining a stable and sustainable fiscal environment consistent with equitable
growth. Stated below are various stakeholders view regarding development of
conducive fiscal environment and fiscal consolidation roadmap, followed by
recommendations of the committee on same.

STAKEHOLDERS VIEW

A. VIEWS OF STATE GOVERNMENT

1. States suggested a recommendation of a flexible model of fiscal consolidation
taking into account the following:
 Recent fiscal trends
 Overall accumulated debts
 Counter-cyclical measures requirement

along with revenue and fiscal targets being adjusted with yearly growth
expectations.

2. States urged fiscal consolidation path should be linked with capital investment
roadmap for each state separately by discarding one-size-fits-all approach.
States shall be given a medium term debt target with flexibility in yearly fiscal
deficit and fiscal liabilities targets,
3. Some states suggested increase in fiscal deficit targets in range of 3.5%-5% of
GSDP and debt-GSDP ratio limit to 30% while Andhra Pradesh urged a fiscal
deficit limit enhancement to 7%.
4. Certain suggestions related to fiscal indicators given by states are:
 Dropping revenue deficit targets
 Anchoring fiscal rules to combination of ratios of fiscal deficit, debt to
GSDP and interest payments to total revenue receipts ratios
 Extension of use of effective revenue deficit to states
5. States also in regard to its NSSF Loans suggested
  Writing off of NSSF Loans
 Granting debt waiver up to 50% of annual repayment
 Resetting all outstanding NSSF Loans at rate of 7.25%
 Option with states to borrow from NSSF Funds.
6. States while advocating write off of Debt and debt relief suggested:
 Grant of one time relief by writing off all outstanding Central loans
including interest
 Consolidation of the outstanding block loans of Ministry of Finance with
interest reset at 7.5%
 Debt waiver of 50% annual externally aided programmes (EAP)
repayment obligation and transfer of exchange risk on EAP to the Union
Government.
 An interest grant of 2% on market borrowings for those States that
adhered to revenue and fiscal deficit targets
7. States believed that fiscal rules shall apply equally to Union Government and
State Government.

B. VIEWS OF UNION GOVERNMENT

1. Ministry of Finance said that a revised roadmap for fiscal consolidation has
been adopted following amendments made in FRBM Act in 2012 and that
Government is committed to abide by rule based fiscal prudence.
2. The Ministry drew attention to the fact that bulk of Government debt is held
domestically and denominated in domestic currency. A key feature of the
country's debt profile is the declining proportion of external debt as a
percentage of total borrowing. This insulates the debt portfolio from external
sector shocks and currency risks
3. Ministry was of the view that the revenue surpluses of the States from 2006-07
onwards (except for 2009-10) was made possible, among other things, due to
robust revenue transfers from the Union to the States, which amounted to
about 40% of total revenue receipts of the States.
4. The outstanding liabilities of State Governments indicate that there is a
compositional shift in the outstanding debts component. The share of Central
loins in the total outstanding debt of the States has declined, thereby limiting
any scope for restructuring or write-off of loans by the Union Government,
except on outstanding non-Plan loans
5. The Ministry stated that there was a need to improve the quality of fiscal
consolidation at the state level by incentivising in revenue generation, reducing
committed liabilities and improving the quality of expenditures .The Ministry
was also in favour of uniform framework on the extent of guarantees that the
States can extend to the borrowings made by PSEs, power distribution
companies and other utilities.
6. The Ministry categorically opposed the request by States for prepayment of
NSSF pointing out that any sudden change in the asset base of NSSF on
 account of draw down by the States would pose a threat to the viability of the
fund. It argued that small savings serve a specific public policy purpose and
should not be viewed as another source of debt financing by either the Union or
the States.
7. Underlying the role of the Union Government in macro-stabilisation, the
Ministry emphasised that the improvement in the finances of the States despite
adverse global economic conditions depict the effectiveness of Union’s
intervention.
8. Also the FRBM Act was amended to provide for a review by Comptroller and
Auditor General of observance of fiscal rules by Union Government. Ministry
also explained that Union Government is answerable to parliament on issue of
conforming to rules set in the Act.
9. Planning Commission indicated that internationally ‘Primary Deficit’ is preferred
as a measure of fiscal performance rather than fiscal deficit. It also suggested
that fiscal deficit targets shall be redefined in terms of structurally adjusted
deficit that allows flexibility from initial target to be factored in on account of
unexpected changes in GDP growth. Its proposal for modification in approach
to fiscal consolidation roadmap included revised accounting norms for equity
investment as well as disinvestment and capitalisation of public sector banks
under Basel III norms.

C. VIEWS OF COMPTROLLER AND AUDITOR GENERAL(C&AG)

C&AG proposed measures to deepen the elements of FBRM reporting in order
to enhance fiscal marksmanship. C&AG pointed out need for improvement in
budgetary forecast, efficient tax mobilisation and cost of compliance.

RECOMMENDATIONS

1. Adoption of a template for collating, analysing and annually reporting the

total extended public debt in the budgets of both Union and State Government
as a supplement to budget document.
2. Union and State Government shall provide a statutory ceiling on sanction of
new capital works to an appropriate annual budget provision.
3. Ceiling of fiscal deficit on Union Government shall be 3% of GDP from 2016-
17 up to the end of 2018-19 and it is believed that improvement in
macroeconomic conditions and tax reforms will enhance revenues of
Government enabling it to eliminate revenue deficit.
4. Fiscal deficit targets and borrowing limits for States shall be
 Fiscal deficit of all states shall be limited to 3% of GSDP. However
flexibility of 0.25% shall be given over and above this limit if borrowing
limit for the year is fixed and its debt-GSDP ratio is less than or equal to
25% in preceding year.
  States will be eligible to additionally borrow up to 0.25% of GSDP in any
given year for which borrowing limit is fixed if interest payments are less
than or equal to 10% of revenue receipts in the previous year
 The above stated two flexibility limits can be availed by States either
separately( if any of above conditions are fulfilled) or simultaneously (if
both conditions are fulfilled)
 This flexibility under either of two options or both can availed by a State
only if there is no revenue deficit in the year in which borrowing limits are
to be fixed and immediately preceding year.
 Also in case the state is unable to fully utilise sanctioned borrowing limit
of 3% of GSDP in any year during first four years of award period (2015-
16 to 2018-19), there is an option of availing un-utilised borrowing
amount only in following year but within award period.
5. For assignment of state-specific borrowing limits as percentage of GSDP for
fiscal year ‘t’, GSDP should be estimated on the basis of :
 Annual average growth rate of actual GSDP during previous three years
 Average growth rate of GSDP observed during previous three years for
which data is available
6. For determining interest payments to revenue receipts ratio required to
determine additional borrowing limits, both figures shall be based on Finance
account data for the year ‘(t-2)’ where ‘t’ is the given fiscal year for which limits
are to be decided. Similar procedure should be followed while calculating debt-
GSDP ratio. The Ministry of Finance shall adhere to these rules for determining
the ceiling of annual borrowing for individual states.
7. States shall be excluded from operations of NSSF scheme with effect from 1st
April 2015. For the fiscal burden prior to this date, since the scheme has been
administered entirely by Union government, no burden of fiscal burden should
be passed on to states. The involvement of states from 1 st April 2015 shall be
limited to discharging debt obligations already incurred by states.
8. Union government shall examine the desirability of setting up a Consolidated
Sinking Fund.
9. Union and states should target on improving the improving the quality of fiscal
management encompassing receipts and expenditures while adhering to
roadmap outlined.
10. Stakeholders urged to recognize predominant role of Union in fiscal
management, while considering roadmap that treats fiscal environment as joint
responsibility of Union and State.
11. Union government and RBI recommended bringing out bi-annual report on
public debt of Union and State governments on regular and comparable basis
and placing it in public domain.
12. Stressing the need for stronger mechanisms for ensuring compliance with fiscal
targets and enhancing the quality of fiscal adjustment, particularly for the Union
Government.
13. An amendment to the FRBM Act should be considered by government to omit
the definition of effective revenue deficit from 1 April 2015. Also the objective of
balancing revenues and expenditure on the revenue account enunciated in the
FRBM Acts should be pursued.
14. An amendment to the FRBM Act shall be made by inserting a new section
mandating the establishment of an independent fiscal council to undertake ex-
ante assessment of the fiscal policy implications of budget proposals and their
consistency with fiscal policy and rules. In addition, we urge that the Union
Government take required action to bring into effect Section 7A of the FRBM
Act for the purposes of ex-post assessment.
15. State Governments may amend their FRBM Acts to provide for the statutory
flexible limits on fiscal deficit. The Union Government may amend its FRBM Act
to reflect the fiscal roadmap, omit the definition of effective revenue deficit and
mandate the establishment of an independent fiscal council. Further, the Union
and State Governments may also amend their respective FRBM Acts to provide
a statutory ceiling on the sanction of new capital works to an appropriate annual
budget provision.
16. The Union Government should continue to exercise its powers under Article
293(3), in an effective but transparent and fair manner, enforcing the fiscal rules
consistent with the fiscal consolidation roadmap suggested for the award
period.
17. The Union Government may replace the existing FRBM Act with a Debt Ceiling
and Fiscal Responsibility Legislation, specifically invoking Article 292 in its
preamble. This could be an alternative to amending the existing FRBM Act and
the State Governments may also consider the same.
 BIBLOGRAPHY
Report on Fourteenth Finance Commission,