‘Fundamental rethink’ needed about health: Finance Commission


India’s economic recovery “can only be excepted to be gradual” after the government eases a lockdown to contain the pandemic and projections for growth have to “relooked entirely”, said the Fifteenth Finance Commission on Friday.

The Commission’s recommendations for the health sector, made in its report for 2020-21, will require a “fundamental rethink” in light of the pandemic, said chairman N K Singh at a media briefing after two days of discussions by the commission’s advisory council. The Commission will wait for gross domestic product (GDP) data in the January-March and April-June quarters before finalising its reports to the government for 2021-22 to 2025-26

States have asked their fiscal deficits relaxed from 3 per cent to 5 per cent, but they will have to come up with new fiscal responsibility and budget management (FRBM) laws—-a time-consuming process, he said. Singh suggested that the states should bring their FRBM laws in-line with that of the centre after discussing with Finance Ministry, and go for a 0.5 per cent relaxation in their fiscal targets.

“I won’t dispute that state finances are under stress, because their own revenues have shrunk. The centre’s revenues have also been hit and hence the divisible tax pool will also be lower than what we projected. GST is also stressed.”

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Chief Ministers, in video-conference meetings with Prime Minister Narendra Modi, have asked their fiscal deficit limits to be raised to 5 per cent. A new FRBM Act will be needed to go to 5 per cent fiscal deficits, but such a law will take time to enact and get consent for. A quicker way will be to utilise the escape clause, as states have been asking for. He also said that while states are seeking to borrow more, they should consider whether there is demand for their bonds.

The attendees in the two-day meetings, apart from members of the Commission, included Chief Economic Advisor Krishnamurthy Subramanian, Sajjid Chenoy and Neelkanth Mishra of the economic advisory council to Prime Minister (EAC-PM) and economists Prachi Mishra, Omkar Goswami, former chief economic Arvind Virmani, Indira Rajaraman, DK Srivastava, M Govinda Rao, and Sudipto Mundle.

“All of them were unanimous to suggest that the projections of real GDP growth made before March 2020 need to be relooked into entirely, and, revised downwards considerably. Once the lockdown of the economy is released, the recovery can only be excepted to be gradual, depending on the ability of the workforce to get back to work soon, restoration of supplies of intermediates and cash flows and, of course, the demand for output. Therefore, the full magnitude of the economic impact of Covid (-19) will only be clear only over a course of time,” said an official statement after the meeting.

“The Council Members felt that the shortfall in tax and other revenues will be large due to subdued economic activity. Hence, fiscal response to the crisis should be much more nuanced. It is important not just to look at the size of fiscal response but also carefully at its design,” the statement said.

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Singh said till the government makes new projections, forecasts given by Finance Minister stand as the basis for the Commission’s work. “We will wait for fourth quarter and first quarter GDP data before coming up with credible recommendations. When the centre wants to revise the forecasts it has given in the budget is a call for the centre to take,” Singh said.

“We have had discussions on whether the recommendations in the first report need to be revisited. What is clear is that there will need to be a fundamental rethink in the health sector recommendations in light of the Covid-19 pandemic,” Singh said.

The 2020-21 report had asked for increasing state capacity by building more hospitals and medical colleges. The Commission had set certain targets for the centre and states to be eligible for health grants, which are supposed to be laid out in the second report. It is possible that these grants may be substantially revised upwards.

Singh also said that for the states to get their fiscal deficits relaxed from 3 per cent to 5 per cent, as some of them have been asking, they will have to come up with entirely new fiscal responsibility and budget management (FRBM) laws, which will be time-consuming. He suggested that the states should avail the 0.5 per cent escape clause, and should consider whether there is demand for their bonds before deciding to borrow more.

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