Cabinet clears FC recommendations on state govt deficits

New Delhi: The government on Wednesday approved fiscal deficit target of 3 percent for states, as recommended by the 14th Finance Commission for the 2015-20 period.

FFC has adopted the fiscal deficit threshold limit of 3 percent of Gross State Domestic Product (GSDP) for states. It has also provided for year-to-year flexibility for additional deficit.

The Cabinet, chaired by Prime Minister Narendra Modi, gave approval to recommendations with two flexibility options, an official statement said.

FFC provided additional headroom to a maximum of 0.5 percent over and above the normal limit of 3 percent in any given year to states that have had a favourable debt-GSDP ratio and interest payments-revenue receipts ratio in the previous two years.

"Since the year 2015-16 is already over, the States will not get any benefit of additional borrowings for 2015-16. However, the implications for the remaining period of FFC award, i.E., 2016-17 to 2019-20, would depend upon respective States? eligibility based on the criteria prescribed by FFC," the statement said.

Further, there is no financial implication for Centre as the borrowings are made by the respective states within the fiscal deficit limits laid down by Finance Commission and incorporated in FRBMA of the states.

However, state will get additional space to raise borrowings which may result in much needed government expenditure for capital projects/ infrastructure.

If a state is not able to fully utilise its sanctioned fiscal deficit of 3 percent of GSDP in any particular year during the 2016-17 to 2018-19 of FFC award period, it will have the option of availing this un-utilised fiscal deficit amount only in the following year but within FFC award period.

Any additional borrowings availed beyond the state's entitlements would be adjusted from Net Borrowing Ceiling of the following year.