Home / Opinion / Columns /  Indian economic documents exude a growth anxiety

The past fortnight witnessed the confluence of three important economic events: the Budget, release of the 15th Finance Commission’s report, and Reserve Bank of India’s (RBI) final bi-monthly monetary policy for 2020-21. These three documents are sending rather dismal messages; the Budget document, in particular, seems imbued with signals of lower growth, with the Finance Commission and RBI further muddying the waters.

The Budget for 2021-22 has projected nominal gross domestic product (GDP) growth of 14.4% over the first advance estimates for 2020-21. Given that 2020-21 was a “non-standard" year and presents a distorted base for comparison, it might be more prudent to compare 2021-22 projected GDP growth with 2019-20, which works out to 9.5% nominal growth. If we charitably assume that consumer inflation during 2021-22 will stick to the 4% target, we are looking at 5.5% real GDP growth. The feasibility of 10.3% gross tax revenue growth between March 2020 and March 2022 must then be viewed through this lens.

Anxiety over tepid growth may have also influenced the government’s beggar-thy-neighbour policy on revenue sharing with states. The Budget should have been the ideal platform to provide a growth impetus to one of the worst pandemic-affected economies. Instead, its design has ensured that states not only end up with less money, but are also deprived of their legitimate claims. Governments of all political persuasions have been shrinking the divisible tax pool through cesses and surcharges. Finance minister Nirmala Sitharaman has now imposed an additional agriculture and infrastructure development cess which will sequester part of import and excise duties, further reducing the divisible pool of taxes and reducing the states’ share. This diversion of states’ share may be viewed as a contingency measure to strengthen government spending, but there is a high risk it will become permanent because governments have rarely retired a cess or surcharge.

The Centre will transfer 13,88,502 crore to states, representing 10% growth over 2019-20. This includes taxes of 665,563 crore and 722,939 crore of grants. The break-up over the years displays the Centre’s increasing reliance on grants in lieu of taxes for funds devolution to states; this implies an increase in “tied’ or conditional funding, compared with taxes which are “untied" and allow states discretionary spending space. This is a disturbing trend and tends to colour the Centre-state relationship in patron-client hues, which is unhealthy for fiscal federalism. M. Govinda Rao, a member of the 14th Finance Commission, has concluded in a recent paper for Niti Aayog that central grants generally work better for the larger and more prosperous states, and thus tend to even accentuate inequalities among states.

Both the 14th and 15th Finance Commissions have prescribed that 41% of the divisible tax pool should be shared with states. Cesses and surcharges amount to roughly 18% of gross tax revenue and are outside the purview of the divisible pool; effectively that allows the government to share only 41% of 82. With the Budget now encroaching upon customs and excise duties, the effective share of states is bound to slip further. States have been demanding that cesses be subsumed in the divisible pool, but that will require a constitutional amendment.

This is where the 15th Finance Commission’s report disappoints. Instead of addressing the growing cracks in India’s fiscal federalism framework, the Commission has developed a patronizing tone on the issue of devolution to states and local authorities. Kerala finance minister T.M. Thomas Isaac wrote recently ( in Economic and Political Weekly (jointly authored with R Mohan and Lekha Chakraborty): “The shrinking divisible pool is a major concern for the states. While the use of cess and surcharges to collect revenue is a denial of the rightful national resources to the states, the commission has not taken this factor into consideration to make an appropriate recommendation to enhance the vertical share of taxes to the states."

On balance, it seems that the Finance Commission has unwittingly become an accessory to this government’s overt centralizing tendencies.

RBI further validates the sense of uncertainty over India’s growth prospects through its 6 February monetary policy statement. The central bank’s GDP growth prognosis for April-October 2021 stretches from 8.3% to 26.2%, which is an exceedingly wide range and perhaps reflects its wariness. But, beyond that, RBI has the unenviable task of managing the Centre’s massive 12,05,500 crore borrowing programme, alongside maintaining low interest rates and flooding the system with excess liquidity, while also trying to keep a lid on inflation.

There is also an inherent contradiction emerging in the credit growth narrative. If banks are to act as midwives to an economic recovery process by accelerating credit growth, they will have to choose between funding either credit growth or investing in the over-supply of government bonds expected over the next 12-13 months. In addition, if RBI’s fears of bank loans souring comes true, the Budget’s 20,000 crore outlay for bank recapitalization doesn’t seem to help the cause of either credit growth or an economic revival.

Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.

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