The 15th Finance Commission headed by Chairman, Shri N.K. Singh today held a detailed meeting with the Governor and Deputy Governors of RBI in Mumbai today.

Key issues raised by RBI Governor, Shri Shaktikanta Das and Finance Commission Chairman, Shri N.K. Singh were discussed in detail at the meeting. These issues  included the following:–

• The necessity of setting up State Finance Commissions for respective State Governments.
• Public Sector Borrowing Requirements.
• Continuity of the Finance Commission. It was felt that this was required more in view of  the  fiscal management requirements of the States, especially given the absence of mid-term reviews of Awards granted by the Finance Commission, as it used to happen earlier with the Awards granted by the Planning Commission.
• Need for Expenditure Codes, especially given that expenditure norms vary  from state to state.
• Role of States in Growth and Inflation, for instance,  role of states in Ease of doing Business.

The RBI made a detailed presentation to the Finance Commission,  on State Government Finances for 2019-20.  The key takeaways are:

• The importance of states in the economy has increased with the shift in composition of government finances.
• Fiscal deficit of states is budgeted to be lower in 2019-20 BE, but RE and actuals deviate significantly (reflecting poor fiscal marksmanship).
• Specific factors drive fiscal slippages: these factors include UDAY in the past and farm loan waivers and income support schemes in 2018-19 RE.
• Outstanding debt as percentage of GDP rising despite moderation in interest payment as percentage of revenue receipts.

The RBI made another presentation on the issues and challenges of the market borrowings of state governments.  The main issues raised in this presentation were the following:

• Increasing  orientation of  state governments borrowing to markets.
• Improving secondary market liquidity – re-issuances, non-standard issuances, widening investor base.
• Risk Asymmetry- Phasing out of ADM, rating of SDLs, valuation of SDLs, more frequent disclosures.
• Strengthening the corpus of CSF/GRF – incentive for increasing the corpus, indicative target of 5% of outstanding liabilities/ guarantees by all states.
• Cash Management – States to improve their cash forecasting capabilities, states’ request to consider avenues for short term borrowings.
• Disclosures – Disclosure of high frequency data; budget presentations and release of financial data may be in a) common format b) within narrow time frame.

• · Contingent liabilities – lack of reliable data, hence there is a need for standardization in compilation and reporting under FRBM and to    enforce uniform ceiling for issue of guarantees.

During its two-day visit to Mumbai, the Finance Commission is slated to have meetings with banks, financial institutions and economists as well. 

State fiscal governance: emphasis on strengthened transparency, borrowing discipline and standardized disclosures to improve subnational fiscal management. The meeting emphasised strengthening State fiscal governance via State Finance Commissions, continuity of Finance Commission engagement, and adoption of common expenditure codes to reduce inter-state variance. It noted fiscal slippages driven by legacy and recent liabilities and a rising state debt-to-GDP ratio. On market borrowings, it urged improved secondary market liquidity, disclosure and valuation practices for state debt, stronger guarantee reserves, standardised reporting of contingent liabilities under FRBM, and better cash-forecasting and short-term borrowing mechanisms for states.