States can amend law to up deficit target to over 3%: Finance panel

NEW DELHI: While acknowledging that states may face difficulties in raising resources due to Covid-19, 15th finance commission chairman N K Singh on Friday said that they can seek to amend the law to raise fiscal deficit from the mandated 3% of GDP (gross domestic product) to a higher level, although the Centre will need to be on board.
“There is no dispute that states find themselves stretched… (But) Why should they raise the issue with the Centre? Each state has its own FRBM (Fiscal Responsibility and Budget Management) Act… They will need the Centre’s concurrence but they need to start the process,” Singh told reporters after a meeting of the Commission’s Advisory Council, while underlining the need to follow fiscally prudent policies.
He also said that like the Centre, state laws too allowed them to deviate from the fiscal consolidation path for a year and they could have a fiscal deficit of up to 3.5% of the GDP. Several states have demanded a relaxation in the overall cap to meet the requirements of higher spending and a fall in revenues — tax and nontax, as well as the transfer from the states.
While the Centre too is expected to be widely off target on the fiscal deficit front, the FRBM Act allows it to borrow from the RBI in exceptional circumstances such as war, national calamity, collapse of agriculture and structural reforms in the economy.
“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,” it added.
It also suggested that the government and the RBI could extend a helping hand to the micro, small and medium enterprises as well as non-banking finance companies.
Although higher deficit levels will allow states to borrow more, Singh cautioned that they should carefully weigh the options of raising money. While market borrowings were the preferred option for the states, the National Small Savings Fund was another avenue, although it came with a higher cost.