Fiscal Deficit of States to be Capped at 3 Percent: Finance Commission
The Commission has recommended that States should completely discontinue the practice of incurring off-budget borrowings bringing all such borrowings on their budgets
Chennai: The 16th Finance Commission has recommended that States’ fiscal deficit should be capped at 3 per cent of their respective GSDP and the Centre should reduce it to 3.5 per cent by FY31.
The 3 per cent cap on fiscal deficit should exclude loans under Special Assistance to States for Capital Investment (SASCI). This will ensure the stability of the debts of the state governments. This should be strictly enforced in accordance with clause (3) of Article 293 of the Constitution.
Fiscal deficit of states, after rising to 3.4 per cent of GDP in 2020‑21 during the COVID‑19 pandemic, came down to 2.9 per cent in 2023‑24, out of which 0.4 per cent on account of SASCI, which was considered over and above the regular deficit limit of the States. Therefore, FC has recommended that States’ fiscal deficit should continue to be capped at 3 per cent of their respective GSDP
The Commission has recommended that States should completely discontinue the practice of incurring off-budget borrowings bringing all such borrowings on their budgets. It has suggested a format for reporting off-budget borrowings of States and recommended that lending institutions should provide an alternative source of data to strengthen the reporting framework for off-budget borrowing.
The Commission has recommended that the Fiscal Responsibility Legislation (FRL) framework of the States be amended to bring uniformity and remove inconsistencies and align them with the fiscal consolidation roadmap of the Commission.
The government said that it accepts in-principle, the recommendation of the quantum (expressed as a per cent of GSDP) of net borrowing ceilings for the states, while other recommendations of the Commission including those related to Off-Budget Borrowings, amendment to State FRLs, Union Government Fiscal Deficit will be examined separately.
The Union Government should reduce its fiscal deficit to 3.5 per cent of GDP by the end of the award period of 2026-2031.
After climbing to its highest ever level of 9.2 per cent of GDP in 2020‑21, the fiscal deficit of the Union Government came down to 5.5 per cent in 2023‑24. It is further estimated to come down to 4.4 per cent of GDP in the Union Budget for 2025‑26. FC has assessed that this should come down to 3.5 per cent of GDP by the end of the award period in 2030‑31.