Covid-19 effects on GDP top agenda as Finance Commission panel meet begins today

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At a time when economic activity has been virtually crippled by the Covid-19 outbreak and revenue generation is down to a trickle, the Economic Advisory Council of the Fifteenth Finance Commission will hold critical rounds of meetings on April 23-24.

The advisory council of the Commission which is a constitutionally mandated body responsible for evaluating the state of finances of the Union and state governments and fix principles for the sharing of taxes between the Centre and states, is expected to discuss the “implications of the pandemic for GDP growth in 2020-21 and 2021-22 as well as the uncertainty about macro variables over time”

The 15th Finance Commission, chaired by former top bureaucrat NK Singh, had submitted its first report with recommendations for the financial year 2020-21 on February 1 this year. The final report with recommendations for the 2021-26 period was to be submitted by October 30. But the Covid-19 pandemic has thrown fiscal plans in serious disarray and the Commission, for its next report, may have to go in for a drastic recalibration.

Tax collections via GST and other means are expected to slide over the March-April period due the fall in retail sales and suspension of virtually all economic activity. Sales of fuels and liquor, the main source of revenue for states and even the Centre, have collapsed. With revenue falling, expenditure by both the Centre and state is in the throes of getting curtailed.

On the meeting, a senior Commission official said, it will be online, presided by the chairman of the 15th Finance Commission and attended by the five members of the council, including chief economic advisor Krishnamurthy Subramanian, Sajjid Z Chinoy, Prachi Mishra, Neelkanth Mishra and Omkar Goswami on April 23. The meeting with the rest of the council members will be held on the next day.

The other key agenda for the Advisory Council Meeting is expected to be possible assumptions for tax buoyancy and revenue in the current year and next year as well and what should be the public expenditure fillip to shore up the economy, a source told India Today.

CHALLENGES AHEAD

The Commission faces an uphill challenge. The dwindling revenue will reduce the share of the states. The states are already raising red flags over unpaid dues and demanding increased allocation.

States have also been presenting a wish list to the Prime Minister including demands for a fiscal package, especially for power and other sectors, extension of RBI moratorium on loans and GST waiver on essentials like coal, rail freight etc.

The economic situation and demands by the states fly against the key recommendations on fiscal roadmap submitted by the Commission in its first report.

On fiscal deficit and debt levels, in the first report before coronavirus outbreak, the commission had noted that credible fiscal and debt trajectory roadmap remains a problem ridden due to economic uncertainty.

It had recommended that central and state governments should focus on debt consolidation and comply with fiscal deficit and debt levels as per their respective Fiscal Responsibility and Budget Management (FRBM) Acts.

Post Covid-19, fiscal prudence has taken a backseat.

On off-budget borrowings, the Commission had stayed that “financing capital expenditure through off-budget borrowings detracts from compliance with the FRBM Act”. It has recommended that both the central and state governments should make full disclosure of extra-budgetary borrowings.

The outstanding extra-budgetary liabilities should be clearly identified and eliminated in a time-bound manner.

TAX COLLECTIONS

On tax collections, the Commission said in 2018-19, the tax revenue of state and central government stood at around 17.5% of the GDP. The Commission said tax revenue is far below the estimated tax capacity of the country.

The Commission recommended: (i) broadening the tax base, (ii) streamlining tax rates, (iii) and increasing capacity and expertise of tax administration in all tiers of the government. But the Commission may be forced to lower the expectations.

IMPLEMENTATION OF GST

On GST implementation, the Commission said that there was a (i) large shortfall in collections as compared to original forecast, (ii) there was high volatility in collections, (iii) accumulation of large integrated GST credit, (iv) glitches in invoice and input tax matching, and (v) delay in refunds.

The economic distress caused by Covid-19 may force the Commission to rework its strategy ahead of the report expected on October this year for 2021-26.

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About the author: Sohom Das
Founder of Tuccho.

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