Covid Exposes Limits of Centralised Approach Finance Commission Must Reset Balance

Context: Fiscal stress (lower revenue with the rising deficit) aggravated by the COVID-19 pandemic has disrupted the path of fiscal consolidation and fiscal decentralization.

Need for Fiscal Consolidation Roadmap

• FRBM review committee’s plan of lowering debt to 60% of GDP by 2022.
• Factoring in the additional state borrowings.
• Rising debt-to-GDP ratio (over 80%).

Finance Commission’s Role in Restructuring Fiscal Consolidation Roadmap 

• Distribution of debt reduction burden: between Centre and States.
• Reshaping India’s fiscal architecture: resetting Centre-state fiscal relations post COVID pandemic.
• Formalisation of conditional additional state borrowing: as a result of their continued expansionary fiscal stance even after pandemic due to economic downturn.
• Extension of the GST compensation cess: to offset state losses beyond the five years. 
• Determining greater fiscal space and autonomy: to Centre or State (tax devolution structure).
• Controlling Centre’s expanded spending: on the items of the state and concurrent list even after its rising revenue deficit.

Way Forward

• Relook at the Centre’s expenditure priorities: to create greater fiscal space for it.
• Finance Commission: Seek to maintain a balance in deciding on contesting claims.
• A realistic assessment of the macro-economic situation.
• Medium-term roadmap and Centre-State relations governance framework.

Conclusion: Finance Commission’s fiscal consolidation road map should be based on greater fiscal decentralisation which aligns with cooperative federalism.