TFC reforms to give state finances a leg-up: Fitch
State governments’ finances are set to improve on the back of reforms initiated by the Twelfth Finance Commission (TFC) and the surrounding policy developments, according to Fitch Ratings, reports Our Bureau.
By TNN |
MUMBAI: State governments’ finances are set to improve on the back of reforms initiated by the Twelfth Finance Commission (TFC) and the surrounding policy developments, according to Fitch Ratings, reports Our Bureau.
The rating agency has said that fiscal consolidation from FY07 to FY2011 will be driven by the three-pronged strategy recommended by TFC — which subjects states to greater market discipline; rewards states for fiscal consolidation targets achieved through debt and interest rate relief; and makes a commitment to fiscal correction statutory.
The recommendation that Centre confines itself to extending plan grants to states, and leaves it to states to decide how much they wish to borrow and from whom, i.e. from the Centre or from the open market, will compel them to open themselves to greater market scrutiny, and foster the development of a market for state paper, according to its report entitled `State Government Finances: Federal Architecture and Institutional Reforms’.
Prior to the recommendations of TFC, Planning Commission transfers were provided in a fixed grant-loan ratio of 30:70 for most states. This means that for every Rs 30 that a state received in grants, it also received Rs 70 in loans, by default, from the Centre.
Since the Centre lent these funds on to states at interest rates that were usually higher than the open market rate (at least for the better-managed states), states were forced to bear the burden of the planning process.
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The agency, however, notes that the steps recommended by TFCs to solve India’s fiscal problems could go further towards addressing the causes rather than the symptoms of fiscal deterioration. According to Fitch, the plan system, which was designed to accelerate growth in a public sector-dominated economy and now sits uncomfortably with the requirements of an increasingly market-oriented economy, should ideally be done away with.
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