The 15th Finance Commission's recommendation for greater transfers to states through grants has been commended by experts, while conditional transfers to local bodies has drawn criticism
Fifteenth Finance Commission (FFC) chairman N.K. Singh has sought to balance the increasing resource requirements of the Centre in view of the revenue uncertainty faced by states at a time when the medium-term impact of the covid pandemic is set to adversely affect India’s growth trajectory and resource availability. Its recommendation for greater transfers to states through grants has been commended by experts, while conditional transfers to local bodies has drawn criticism. In an interview, Singh explains the rationale behind the key recommendations and the way ahead. Edited excerpts:
How did the pandemic change the assumptions and plans of the FFC?
The covid times influenced us in three ways. One, in according priority to health and health-related infrastructure. We have dealt with issues not only of financial outlays but many regulatory changes that would be needed to improve the cost efficiency and the quality of health infrastructure. Related to this, we realized that expenditure priorities need to be reconsidered. That is why in reprioritization of expenditure, we have given much higher weightage to health-related expenditure. In the ₹4.36 trillion that we have assigned to the third tier, we have assigned roughly ₹76,000 crore for health and health-related infrastructure. Third, it has influenced us because we have recognized that as we need to be concerned both about life and livelihood, public outlay would have to be somewhat more elevated to address this pandemic and also to make sure that the economic recovery process is fostered. This influenced us in giving a greater fiscal range instead of a fiscal point both for the Centre and states. It also influenced us in assigning higher borrowing limits for the Centre and states. So, covid influenced us in multiple ways.
How different would the report have looked without the pandemic?
It’s a hypothetical question, but if it were not covid times, first and foremost the resources available would have been significantly more. The impact of covid circumscribed our revenue outcomes in multiple ways and the resource envelope on the basis of which we did our planning naturally would have looked significantly different because assignment of the revenue deficit grants this time which is ₹2.94 trillion, I don’t know with much higher availability of revenues what those numbers would have turned out to be. So, much higher revenue buoyancy would have given greater room for accommodation of revenue expenditure. We compressed the revenue deficit of the states rather stringently looking at the paucity of resources that were available. Second, we may have given an equal priority to education and health. This time, the priority on health was really significantly more. So, it may have resulted in different prioritization of preferred expenditure patterns and expenditure outcomes. Third, the fiscal parameters that we would have given would have been more stringent. The room for flexibility that we have given to both the Centre and states may have been more stringently considered by us if the stresses of life and livelihood were not so overpowering as they were during the pandemic times.
Do you agree with the notion that we may have reached natural limits of increased devolution to states and it can’t be increased beyond 41% or 42% by future finance commissions without shifting some of the Centre’s responsibilities to the states?
Yes, some domain experts have expressed this view. I have great respect for some of them, for instance, C. Rangarajan who was the chairman of an earlier (12th) Finance Commission. However, there are many caveats in that. What about cess and surcharge? But that is a much larger debate.
It is being argued that effective devolution share to states is actually shrinking because of this increased reliance of Centre on cess and surcharge. Do you think future finance commissions should consider capping cess imposition at a certain level if not prohibiting it?
The gross revenue receipts (GRR) in our modelling for the five-year period comes to ₹154 trillion. Take out from that the dividend payment of the Reserve Bank of India and spectrum prices, and you get gross tax revenue (GTR) of ₹134 trillion, which is what the Finance Commission looks at and which is the only sharable portion. If you take out cess and surcharge and other non-sharable part of GTR, the divisible pool comes to ₹101-102 trillion and 41% of it gives you about ₹42 trillion. Add to it ₹10 trillion of grants to states.
Cess and surcharge is not part of the divisible pool. However, it’s not in the hands of the Finance Commission to cap it. This requires a constitutional amendment. It was in 2000 during the period of (then PM) Atal Bihari Vajpayee when there was a constitutional amendment that kept cess and surcharge outside the divisible pool. So, it raises a broader point for public debate what should constitute the ingredients of the divisible pool. If cess and surcharge are to be part of the divisible pool, there has to be a constitutional amendment. Successive Finance Commissions have made adverse remarks against cess and surcharge, including us. We are aware that between the 14th and 15th (Finance Commissions), the incidence of cess and surcharge has gone up. We have sought to address this by calibrating the grants in an upward direction. If the cess and surcharge were not there, maybe we could have calibrated the grants somewhat differently. This is to partly compensate for the increased incidence of cess and surcharge that is shrinking the divisible pool in an adverse manner for the states. This is the only flexibility that we have because the bigger issue you have raised requires a much wider discussion and consensus among all stakeholders, including the Centre for redefining what should be the ingredients of the divisible pool.
I had seriously examined a defence cess for the non-lapsable pool. I also examined the nature of a surcharge but moved away because I can’t be double-faced.
On financing of the non-lapsable defence fund, you seem to have taken a cautious stance while the expectation was that you will recommend a cess. Why is that? The Centre does not seem to be in agreement with the funding pattern suggested by you.
The government has accepted in principle the creation of a non-lapsable fund. We did not do it sou moto. We did it in response to a term of reference that was specifically given to us. As there was an asymmetry in the procurement cycle and financing cycle for capital expenditure for defence and internal security, we suggested a non-lapsable fund to impart predictability and certainty for capital expenditure of defence.
We have given a financing module that has two components. Component one involves more optimum use of the defence ministry’s internal resources, namely monetization of defence land and proceeds from disinvestment of defence-related public sector units. Plus, we moved away from a defence cess, surcharge or a special tax for internal security. I have recalculated GRR in a manner that frees up fiscal space by enabling the Consolidated Fund of India to bear part of the defence expenditure cost. We have obtained substantial legal opinion on this. Incurring of defence expenditure transcends any distinction between whose obligation it is and it is an unmitigated obligation of every Indian citizen.
Out of the ₹2.38 trillion non-lapsable defence fund, ₹1.53 trillion will be transferred to the fund from the Consolidated Fund of India over the five-year award period of the commission. This means states are actually contributing to the defence fund and the divisible pool for the states has actually shrunk in that sense.
Of course, states are paying, but not through a cess or surcharge. I have not touched the divisible pool. The divisible pool is a subset of GTR. I have done it by calibration of the GRR. The states have a right only over the divisible pool. But yes, to your more generic question, states have a partnership. It’s a shared partnership considering the nature of the defence liability and expenditure.
Some believe you may have exceeded your brief by making transfers under local grands conditional and performance linked. Don’t you think that if states fail to meet the conditions, it is the local bodies that will suffer?
First and foremost, please understand that the Finance Commission is not obliged to give any resources to local bodies. However, based on past practice and tradition, we did decide to not only give an award, we gave a substantially enhanced the award to the third tier. Second, we felt that instead of giving untied resources, it would be more prudent to optimize expenditure outlays. Because it is a grant, it is not a right (of states).
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!