In a significant move towards strengthening India’s fiscal framework, Comptroller and Auditor General (CAG) K Sanjay Murthy and Chairman of the 16th Finance Commission, Arvind Panagariya, convened on March 5, 2025, to discuss key aspects of public finance. This high-level consultation aimed to evaluate the financial health of Union and state finances, local bodies, and Public Sector Enterprises (PSEs) while exploring solutions to fiscal challenges.
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The discussion emphasized transparency, revenue optimization, and better financial management, ensuring the Indian economy remains resilient amid evolving fiscal demands.
Macroeconomic Challenges
1. Union and State Finances
One of the critical issues discussed was the widening gap between expenditure and non-debt receipts at both Union and state levels. States are witnessing a decline in State Own Tax Revenue (SOTR), with significant variations across different regions, causing fiscal imbalances.
To improve fiscal sustainability, the CAG and the Finance Commission stressed the need for:
- Regular reporting of off-budget borrowings
- Stricter adherence to Fiscal Responsibility and Budget Management (FRBM) Act targets
- Considering post-audit liabilities computed by the CAG for better fiscal planning
These measures aim to enhance financial transparency and fiscal discipline across states.
2. Strengthening Revenue Collection
To bolster state finances, discussions centered on improving revenue collection from state excise, stamp duty, and registration fees. The Finance Commission suggested:
- Regular updates to market value guidelines
- Better classification of property types to improve property tax efficiency
- Leveraging digital tracking methods to enhance revenue administration
Such initiatives could help minimize tax leakages and discrepancies in state finances.
Reforms in Tax and GST Systems
3. Improving GST Administration
The Finance Commission recommended strengthening GST administration by:
- Expanding the GST framework to integrate unregistered businesses
- Utilizing real-time data analytics for tax collection
- Enhancing inter-state tax apportionment mechanisms
These measures aim to reduce tax evasion and improve indirect tax efficiency in India.
4. Standardizing Accounting Practices
A key recommendation was the need for uniform accounting systems across all levels of government. Standardized accounting would:
- Improve fiscal transparency
- Enable better tracking of public expenditures
- Strengthen financial reporting and accountability
Strengthening Local Governance
5. Financial Management of Local Bodies
The consultation also focused on improving financial management at the local level, given their dependence on central and state grants. The CAG and Finance Commission emphasized:
- Better revenue collection by local bodies
- Increased financial transparency and accountability
- Stronger fiscal autonomy to enhance governance
These measures could lead to more efficient public service delivery at the grassroots level.
Contextual Developments
This consultation occurred amid the Union government’s proposal to reduce the states’ share of federal tax revenues from 41% to 40%, starting in FY 2026-27. This adjustment is aimed at giving the central government additional fiscal space to manage rising expenditures. However, the Finance Commission will carefully review this proposal, as it may affect state finances and fiscal autonomy.
Additionally, the CAG stressed that public sector reforms are essential to improving:
- Tax collection efficiency
- Debt management strategies
- Financial planning through AI-driven analytics
These measures could enhance fiscal accountability and revenue optimization.
The Path Forward
The collaboration between the CAG and the 16th Finance Commission marks a proactive approach to tackling India’s fiscal challenges. By focusing on:
- Revenue optimization
- Tax reforms
- Better financial governance at all levels
India aims to strengthen its economic foundations and ensure long-term fiscal sustainability. The recommendations made in this consultation could serve as a blueprint for creating a more transparent, efficient, and resilient financial system.
By – Nikita
