Finance Commission Discussing Base Year Change, Says NK Singh

The 15th Finance Commission is facing challenges to making projections for Asia’s third-largest economy as a result of the disruption caused by the Covid-19 outbreak.

Historically finance commissions have used the current year as the base year for making its recommendations, the commission’s Chairman NK Singh told reporters on Friday. “This year on account of extraordinary factors, using the current year as the base year has many challenges,” he said after a meeting of Economic Advisory Council of 15th Finance Commission.

There are several options for choosing the base year, Singh said, adding that these are being considered and a decision hasn’t been taken yet. Some of the suggestions include using data for July-September to make recommendations for the next five years. Taking the average growth rate of the year before the pandemic as base year is another.

“Each of these suggestions are brought with their own methodological challenges and on the probability of assumptions,” he said. “We have received these views and we will have to debate them internally in the commission.”

The world’s most stringent lockdown in India lasting more than two months wiped out all but essential economic activity. That decimated consumption, which contributes nearly 60% to the economy. As a result, India’s GDP is expected to contract by around 4.5% in the ongoing fiscal, according to International Monetary Fund.

The commission is facing some “unique” challenges as judgment will become inappropriate if assumed data doesn’t support the conclusions, Singh said. The panel will make recommendations for 2021-22 to 2025-26 by Oct. 30, 2020.

Unlike other finance commissions—that could assume nominal GDP and revenue buoyancy for the entire five years—the current panel, won’t be able to make those assumptions, he said.

The 15th Finance Commission will have to use “imagination and innovation” to come up with potential growth rate of economy without being too pessimistic or optimistic and aspirational, he said. One way to calculate potential growth rate is by taking 30-year average, and the real GDP growth would be around 6.5%, he said.

‘Green Shoots’

Singh said the focus should now be on fastest revival of the economy, and not on fiscal and debt targets. “There is a sharp recovery in the economy.”

Anecdotal evidence from industry suggests a sharp recovery, and supply-side disruption would be minimal, he said. Fairly rapid resumption of both employment and economic activity suggests that the Indian economy is in the process of recovery, he said.

“There are multiple green shoots, and not one green shoot only, covering various sectors of economy—agriculture, manufacturing and essential services,” Singh said.

The agriculture sector has been the least affected, and a normal monsoon will help further in the revival, he said.