C Rangarajan, the Chairman of the Twelfth Finance Commission, stressed on the need for a permanent finance commission.
"If the Finance Commission is made a permanent body, the way grants are made will change. Annual projections can be used to allocate funds to the states instead of five-year projections," Rangarajan said on the sidelines of a conference on the TFC held in New Delhi.
He added that the constitutionality of the move would, however, have to be studied first.
On the issue of making the Finance Commission's term co-terminus with that of the Planning Commission, he said it would not be of much use, as the Plan was usually finalised a year into the Plan period while the Finance Commission had to submit its report before its term began.
The Finance Commission would anyway have to make projections on growth and other economic indicators when deciding on the level of grants to be given to states, Rangarajan said.
Speaking on the issue, M Govinda Rao, director, NIPFP, said there should be a permanent Finance Commission to handle all grants, while the Planning Commission should focus only on infrastructure development and providing loans to states. The non-Plan grants should be removed from the Plan body's purview.
Earlier, speaking at the conference, Rangarajan said the TFCs task was different from that of the earlier ones as there was a specific mention of debt reduction and equitable growth in its terms of reference.
The combined fiscal deficit of the Centre and states was more than 10 per cent in 2002-03, compared to 8.8 per cent in late eighties, he said, adding that the burgeoning fiscal deficit might lead to a rise in debt, increasing interest payments, fall in developmental expenditure and a consequent impact on the growth rate.
"The adverse impact of a large fiscal deficit on the economy should not be under-estimated. Fiscal deficits of the Centre and the state governments need to be brought down in a calibrated way by augmenting revenues and pruning expenditures," he said.
Referring to the revenue deficit of the Centre and the states, which increased to over 7 per cent in 2001-02 from 6.3 per cent in 1999-2000 and 3.6 per cent in 1994-95, he said, "With current trends indicating continued deterioration, the situation is likely to further worsen by 2004-05."
On fiscal sustainability, Rangarajan said the rise in the fiscal deficit should be matched by a rise in the capacity to service the increased debt.
However, in India, about 70 per cent of the borrowings of the government were spent on areas other than capital assets, which resulted in lower returns.
"Fiscal policies will have to be restructured to facilitate acceleration in growth with macro-economic stability. Public spending on roads, water supply, power, primary education and health need to be stepped up," he said, adding that failure to do so would dampen the growth momentum.
Vijay Kelkar, the adviser to the finance minister, said the government might fix an annual target for reducing the fiscal deficit pegged at 5.6 per cent of GDP for 2003-04, in the face of mounting pressure from the TFC.
Both Kelkar and Rangarajan favoured that state governments should also come up with fiscal responsibility acts to contain their fiscal deficits.
Kelkar even recommended state level statistical commissions on the lines of the National Statistical Commission in order to ensure better data availability.