ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Twelfth Finance Commission and Backward States

The recommendations of the Twelfth Finance Commission particularly for backward states - allowing them to directly access the market, placing borrowing limits consistent with fiscal responsibility legislation and transferring external assistance to states on a back-to-back basis - have far-reaching implications. Fixing borrowing limits based on capacity to service debts and uniform targets for fiscal deficit reduction will further accentuate regional imbalances. Debt-stressed and backward states may find it difficult to raise loans from the market because of their lower creditworthiness and higher risk perception among lending agencies. The scheme of debt write-off linked to revenue deficit reduction recommended by the commission favours states with a low base year revenue deficit. A more realistic approach would be to allow a relatively longer timeframe for backward states to effect fiscal correction, while ensuring that states as a whole bring down their fiscal deficit to 3 per cent of GDP by 2009-10.

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