New Delhi, Feb 1 (IANS) The Finance Commission has recommended that the fiscal deficits of states should stay within the 3 per cent of Gross State Domestic Product (GSDP) limit during the award period 2026–27 to 2030–31, and that they should not go in for off-budget borrowings to ensure financial stability.
It also recommended that the Comptroller and Auditor General (CAG) include disclosures on off-budget borrowings in State Finance Accounts.
The commission has highlighted inconsistencies in State-level Fiscal Responsibility Legislations (FRLs) and has urged states to amend their FRBM laws to align with the recommended consolidation path. It has also recommended that the definition of deficit and debt be broadened to include off-budget liabilities.
In its report, for 2026–31, the Commission states that the 3 per cent ceiling on state borrowing should be strictly enforced under Article 293(3) of the Constitution to ensure debt sustainability.
“States should completely discontinue the practice of incurring off‑budget borrowings and bring all such borrowings onto their budgets. If, for any reason, off‑budget borrowings are undertaken, there should be a framework for their regular annual reporting, preferably as part of the budget,” the 16th Finance Commission has stated in its report.
It has clarified that interest-free on-lending by the Centre to States under the Special Assistance to States for Capital Investment (SASCI) would continue to be outside this limit, as is the current practice.
The report has highlighted that in recent years, states have increasingly relied on market borrowings to finance their deficits. The share of state government borrowings in total government borrowings has risen significantly since 2015‑16, accounting for about 33 per cent of total government securities issued in 2015‑16, which increased to 43 per cent in 2024‑25, the report points out.
As a result, outstanding securities have shot up to 2025‑26, compared to 24 per cent in 2015‑16. Higher market borrowings by the states also arise from the fact that they do not avail the National Small Savings Fund (NSSF), the report observes.
According to the fiscal roadmap chalked out by the Commission, the Union government’s fiscal deficit is targeted at 3.5 per cent of GDP by 2031, while that of the states is fixed at 3 per cent, which works out to a combined fiscal deficit of 6.5 per cent of GDP.
–IANS
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