Achieving 7-8 percent growth in the medium term is critical and central to move towards a sustainable debt trajectory, Chairman of 15th Finance Commission NK Singh.
“Going to next year, we must not have that monotonic behaviour that it’s a base year correction,” he told reporters in Delhi today. “Important to see how sustainable it is to grow in the medium term and achieve 7-8% growth.”
All extra borrowing by states and the centre will have implications on debt, and achieving sustainable debt trajectory will be challenging in the medium term, Singh said. The path to sustainable debt will be contingent upon growth, he said.
The central government has increased its borrowing for the current fiscal to Rs 12 lakh crore from Rs 7.8 lakh crore, and allowed states to borrow up to 5 percent of their GDP that’s contingent on certain conditions.
“Need to push growth trajectory in the medium term to much higher number that enables us to manage much higher debt,” Singh said.
Singh was speaking after the meeting of a sub-committee of 15th Finance Commission to review the fiscal consolidation roadmap of the government. A statement issued by the committee said central and state governments will have to make substantive expenditures to tackle the unprecedented situation caused by the coronavirus pandemic. “This coupled with the downward pressure on economic activity caused by the pandemic will impact the debt to GDP ratio of the general government,” the statement said.
The panel to review fiscal framework, also chaired by Singh, had suggested paring government debt to 60 percent of GDP by financial year 2023, with 20 percent being earmarked for states.
Singh said that the central government has adhered to the architecture of fiscal federalism by allowing states to borrow more.
However, it’s not binding on them to use this additional facility to borrow. The conditions attached to extra borrowing by states was recommended by 15th Finance Commission in its first report, too. To borrow over 3.5 percent of GDP states need to implement reforms such as One Nation One Ration Card scheme, ease of doing business, reforms of power sector distribution companies and reforms of urban local bodies.