FEBRUARY 07, 2020

By TIOL Edit Team

THE Fifteenth Finance Commission's (15th FC's) call "to tread with caution" in making economic forecast is well-timed. It comes against backdrop of economic uncertainty & Government's initiatives to revive animal spirits & reboot economic growth.

The call is significant as it comes close on heels of diverse reports about global risks & outlook with frequent mention about India. The release of 15th FC's 1st

report by Government also coincided with the presentation of the Union Budget on 1st February 2020.

The Budget proposals & Economic Survey's outlook have to be combined with 15th FC's wisdom. It is in an enviable position to have access to ample inputs from both the Centre and the States. 15th FC has rightly noted that forecast uncertainty is high around major structural changes in any economy. It believes that "making credible projections for five years using the current year as the base runs the risk of turning out to be excessively aspirational and inaccurate".

Current phase of excessive conservatism might lead to forecasts that are out of tune with India's growth potential. The forecasts might even turn out to be lower than the outcome expected from ongoing structural changes & rolled-out government initiatives. 15th FC wants to be fair to both the Centre and States in keeping with its constitutional mandate.

As put by 15th FC Chairman N.K. Singh: "We look forward to examining the key macro variables of the next few quarters and undertaking a more robust assessment and credible forecast for a medium term horizon".

The absence of projection about Real GDP or GDP at constant (2011-12) prices for 2020-21 in the Budget speech has to be seen in this context. The Finance Minister Nirmala Sitharaman thus disclosed only projected Nominal GDP or GDP at current prices at 10%.

We hope the economic picture would become clearer in next two quarters to facilitate it to make better projections about fundamentals & accordingly make its recommendations in its second and final report to be submitted by end-October 2020.

15th FC recommendations & observations especially about taxation in its 1 st report merit serious consideration by all stakeholders.

Its observation about stagnation in the country's tax receipts as percentage of GDP in last two decades should trigger fresh debate on taxation reforms.

According to the Report, "The tax revenue of the Union and States in India stood at around 17.5 per cent of GDP in 2018-19 - far below India's estimated tax capacity - and has remained broadly unchanged since the early 1990s. In contrast to India, tax revenue has been rising in other emerging markets. There is a compelling case for raising India's tax ratio from both macroeconomic and redistributive perspectives".

We hope Finance Ministry would give timely attention to 15th FC's recommendations for streamlining goods and services tax (GST) system and ushering in direct tax code.

Similarly, we expect both the Centre and States to act on Commission's advice for improving fiscal transparency. The report pointed out that the government currently finances expenditures through off-budget borrowings and through parastatal entities.

It has called upon the governments to identify and eliminate such outstanding extra-budgetary liabilities in a time-bound manner. They should thus report fully fiscal deficit and debt in their respective accounts.

A commendable feature of the Report is expression of intent by the Commission to recommend incentives to States to implement specified reforms in agriculture, power, education, etc. It has aptly alerted States to become qualified to avail of incentives by implementing sectoral reforms. A case in point is agriculture where 15th FC has listed three model laws circulated by the Centre for consideration & enactment by the States.

Another notable signal in the Report is about exports. It says: "We propose to consult various stakeholders, particularly the States, and examine the feasibility and potential effectiveness of a performance-based incentive related to exports, including its design. We would also like to support export-related employment generating initiatives given its significance in enhancing the growth potential of States in terms of GSDP".

Taking note of various steps being taken by the Government to accelerate GDP growth, the Commission has concluded its report by striking the optimism chord. It believes that many of the initiatives currently underway and those in the offing will have beneficial effects on the growth momentum of the economy.

As put by the Report, "The Commission believes that any credible medium-term fiscal projection must be built around India achieving its growth potential. The strengthening of the Union-State federal partnership will be an important driving force for enabling the country to realise its growth potential. There is no escape from the quest to seek double digit inclusive growth with continued macro-economic stability".