Not just a budget for the states
The budget has delivered beyond cooperative federalism
This is not last year’s budget. There is not a sprinkling of largesse, nor the romance with private corporate social responsibility. It could not have been so. Chairman of the 14th Finance Commission Y.V. Reddy made sure of that.
If not a tectonic shift, with disruptive connotations, the report of the Finance Commission, and the budget, which follows resolutely in its wake, brings a quantum change in our federal fiscal arrangements. Along with the abolition of the Planning Commission and the restructuring of plan transfers, a new era in Union-state relations is on us, one that shifts the balance of responsibility to the states. To its credit, the Union government is not flinching, but is responding, even creatively. The honey pot for goods and services tax (GST) just got larger. Service taxes, which have been hiked in this budget, are now as large as customs taxes, up from half as large in 2007-08.
Neither is the Union government short-changing states by giving with one hand while taking with the other. While the number of central schemes to be fully supported by the Union government is now down to around 30, and eight have been dropped entirely, and the rest partially funded, the overall transfer to the states is half of total receipts (including non-tax revenue), and about 68% of the divisible pool. Compare that to 39% and 49% in 2007-08. While the tax share of the divisible pool has since statutorily risen from 28% to 42%, the Union government has also raised the non-statutory share from 21% to 26%.
The funds have gone. It remains to be seen whether the states will accept the functions as readily, and whether the functionaries, hitherto comfortable in Delhi, will bravely follow.
But the budget has delivered beyond cooperative federalism. On public investment in infrastructure, it has earmarked an additional Rs.4 on each litre of petrol and diesel for the road fund, which will give the National Highways Authority of India almost Rs.23,000 crore, up from Rs.9,500 crore last year. Railways too have an additional Rs.10,000 crore in budgetary support. There is talk of corporatizing ports, tax-free infrastructure bonds, a National Investment and Infrastructure Fund and most promisingly, a “rebalancing of risk” in public private partnership (PPP).
Moreover, while one can cavil that there were too many institutions mentioned in the speech, it would be unfair if one ignored the institutional changes being attempted in simplifying taxation, reforming bankruptcy law, re-crafting PPP frameworks and reorganizing regulation, starting with the merger of the Forward Markets Commission and the Securities and Exchange Board of India. Along with this, a possibility of kick-starting the bond market by the new Public Debt Management Agency. There is even, given that recent Ponzi scams have happened in between the regulatory cracks, a promise of “sector-neutral Financial Redressal Agency that will address grievances against all financial service providers”.
There are other positive signs too, such as the glimmer of universal social protection, focused on insurance and tax-sops for the relatively rich to participate in the national pension scheme. A 13-fold architecture of housing, sanitation, health, education, electrification, physical and digital connectivity, business support etc. has the beginnings of bringing government back into its domain, even as it exits areas it should avoid.
But, many hard decisions remain. Two bear mention. The continuing expenditure on food, fertilizer and fuel subsidies has dropped from over 2% of gross domestic product, but remains worryingly high at 1.7% of GDP and over a fifth of the Union’s revenue receipts. The promise to use the “JAM Trinity—Jan Dhan, Aadhar and Mobile…to transfer benefits in a leakage-proof, well-targeted and cashless manner”, is yet to be reflected in the numbers.
The other is tax effort. The finance minister appears to have a Laffer-like belief in lower taxes leading to higher revenue, but it is instructive to remember that in 2007-08, the gross tax to GDP ratio was 12.5%, compared to just 10.3% today, a potential extra revenue of over Rs.3 trillion. Sure, growth will facilitate, but it may also help if Aadhaar’s conception extends beyond plugging leakages in subsidies, to those in tax collection, by incentivizing its linkage to PAN and property transactions.
Will all this bring private investment back in? For those acche din, we still wait, but with a bit more hope than last year.
Partha Mukhopadhyay is a senior fellow at the Centre for Policy Research, New Delhi.
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