Opinion | Not a Rambo package, as the ₹20 trillion figure suggests3 min read . Updated: 18 May 2020, 01:36 AM IST
This package goes against the ‘underwriting culture’ of economic policy
The prime minister’s philosophy on economic help has become very clear; don’t give them fish, teach them how to fish. While this is a perfectly valid long-term sustainable solution, the question is if this is the right time to try it out? Even the most seasoned of fishermen stay ashore during the monsoon. And it is a stormy ocean out there. No one has a clue, let alone firm understanding of how and how long the crisis will pan out.
There is an element of systemic relief in the package; but the core of the package lies elsewhere. In its design, the package is trying to change the nature of state intervention in India. This package goes against the prevalent “underwriting culture" of economic policy. Till now, the policy of stimulus has been only about increasing public expenditures. In this package, it is not so.
It is not the Rambo package which the ₹20 trillion number suggested. It is not about spending money from the stressed coffers. It is about “leveraging" money; a concept that doesn’t find a place in the policy lexicon of Raisina Hills. It is a Malabar Hill concept!
In this package, public money has been treated as “equity", which has been leveraged to build the ₹20 trillion package. The finance minister would have done well to identify how much is its “cash" contribution and how much the leveraging. At the moment, it looks like about one-fifth is the cash outgo and four-fifth is the leverage. This is tad high and should ideally have been one-third–two-third. That would have been a good balance.
The real problem with the package is in the way the Centre has treated state governments. It seemed to show that the Union government had been “generous" in devolving to the states their share in the central taxes. As also the statutory grants. This should, and it will, make the states see red! This amounts to redefining fiscal federalism. It is theirs by right and the Centre’s constitutional obligation. Indeed, the expenditures to be incurred by the Centre can be defrayed only after they have devolved to the states.
To say that devolution has been done on the basis of the budget estimates is also a half-truth. The fact is that the budget estimates of the Centre’s tax revenues is ₹70,000 crore less than what was estimated by the Fifteenth Finance Commission. So, even before covid-19 started, the states have lost in devolution.
In any case, in the coming months, as the collections of the Centre drop, which they will, the states will bear their share of the loss. In fact, therein lies the key problem.
When the country loses a ₹100 in tax collections, the Centre loses only ₹29 and the states lose ₹71! It is a double whammy for the states.
This is so because, whatever the loss of revenue faced by the Centre, it will pass on 42% of that loss to the states! As this is happening, the states are losing their own revenue along similar lines. In fact, it a triple whammy because the major expenditure commitments during this health and humanitarian crisis has to be borne by the states; health expenditure is a large part of their responsibility.
By conditionally increasing the states’ FRBM limits from 3% to 5%, the one good thing that the finance minister had done for the states has been rendered ineffective.
The macroeconomic implication of higher borrowings by the states will raise the cost of capital for the private sector. If this package has to come anywhere close to fruition, the Reserve Bank of India must supplement it with easing the regulatory and prudential norms; restructuring with moratorium with interest relief till 31 March 2021 for the borrowers who are under enormous stress.
Haseeb A. Drabu is former finance minister of Jammu & Kashmir.