Finance commission recommendations aren’t a one-day match: N K Singh | Business Standard News

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In a Q&A, the chairman of the 15th Finance Commission is emphatic that cooperative federalism remains robust and dwells on the possibilty of dividing agro infra cess between Centre and states

Fifteenth Finance Commission chairman N K Singh concedes that incidents of cesses and surcharges have significantly gone up between the 14th and 15th finance commission recommendations. He tells Dilasha Seth and Indivjal Dhasmana that the 15th finance commission was cognizant of this fact. That is why it made robust recommendations on grants to partly compensate states for this trend. Edited excerpts:

Why did you retain tax devolution to states at 41 per cent, especially in this crisis kind of a situation?

Irrespective of the nature of government, no state that the finance commission visited was not wanting to see an upward devolution from 41 per cent. At the same time, as far as the Union Government is concerned, they were already reeling under the impact of huge fiscal pressure. Actually, we have kept it at 42 per cent, because 1 per cent is the adjustment for J&K, because we have done it for only 28 states, not 29. If you see the evolution of the finance commission over a long period, the increase in the devolution to states was always incremental from 28, 29, 31 and 32 per cent. For the first time, a tectonic shift was made when the 14th finance commission raised it from 32 per cent to 42 per cent. We took all considerations into account. So looking at the needs of the states and the Union Government, and looking at the priority to stability and continuity and predictability, adhering to 41 per cent was fair and appropriate. It balances the needs of the states,with the financial compulsion of the central government.

These days, the Centre is resorting to imposing cess and surcharges, sidestepping recommendations of the Finance Commission. This budget also had agriculture infra cess. Do you think the Budget proposal indirectly sidesteps finance commission recommendations?

This issue is very much under focus currently. First and foremost, the mandate of the finance commission is to concentrate on gross tax revenue and we have to give our award on the divisible pool. According to constitutional provisions, cesses or surcharges are not part of the divisible pool. Therefore they are outside the mandate of the finance commission. Secondly, successive finance commissions have mentioned the concern on cesses and surcharges neutralising the devolution given through the finance commission formula. The 12th, 13th and 14th commissions commented on it, and so have we, that cesses and surcharges must not be raised in a manner that would undercut or neutralise the benefits through devolution. Thirdly, we were cognizant of the fact that the broader issue of cess and surcharge was outside our mandate. And the robust recommendations on the grants is to partly compensate that as we recognised that between the 14th and the 15th commission period, incidents of cesses and surcharges had risen significantly. That is why there was a somewhat generous Rs 2.95 trillion on the revenue deficit grants and a significant rise in the devolution for disaster management. These are by way of grants so we tried to balance the whole thing out by somewhat recalibrating the grants upward, to mitigate the incidence of shrinkage in the divisible excesses and surcharges. However, the broader issue of what should constitute a divisible pool in accordance with the letter and spirit of Article 280 of the Constitution needs a much wider debate and consensus among all stakeholders, because any change in the ingredients of the divisible pool would require a constitutional amendment.

You said recommendations on grants were robust. But the sector-specific and state-specific grants proposals, totaling Rs 1.8 trillion were not accepted by the Centre...

The bulk of the sector-specific grants are related to two specific sectors. One is health, the other is agriculture. The one for health is Rs 32,000 crore and the one for agriculture is Rs 45,000 crore. Now, of the health grants that we are giving to the third tier, Rs 70,000-71,000 crore will be designated for the health sector itself to strengthen Primary Health Centres, testing laboratories, and such like. Then comes to agriculture. They (the government) have not rejected it. What they have said ,in my view, is very innovative. They said that in the restructuring of centrally sponsored schemes and central outlays, these recommendations would then be subsumed in some form or the other, because there is a much larger centrally-sponsored scheme, which they have on the health sector. So there is no rejection, they will be considered in the context of the rationalisation of the framework of the centrally sponsored schemes, and the central outlays. Then you come to state-specific. On that, they have indicated that given fiscal pressures, they will give these very serious considerations, and that they will consider them. Now consider the fact that the 15th finance commission is not a one-day match. It’s a five-year award. So, it is up to the Centre to act on them at any appropriate time, based on our award period. If I were in the finance ministry looking at the fiscal pressures, I would have done exactly what the finance minister has done. At this time we are facing these kinds of fiscal pressures which were not so evident earlier. So there is no rejection.

There was some confusion about whether agriculture infa cess could be shared with the states. Is it constitutionally possible for the Centre to share cess with the states?

I’m not a constitutional expert. But prima facie, it looks to me that strict reading of the Constitution implies that cesses and surcharges do not constitute part of the divisible pool. However, if by other means, like executive orders, some part of the cess or some part of the surcharge is made available to the states by the central government, that is up to the central government to augment revenues of the states. But as far as the formula is concerned on the divisible pools, we have to go by the letter of the Constitution. And the Constitution right now keeps cess and surcharge out.

Be it is the issue of cesses and surcharges or GST, Centre-state relations have worsened over the past few years. How do you see that impacting the economy and what are your recommendations on strengthening cooperative federalism?

I don’t think federal relations have worsened. In fact, they have been strengthened. I do not think there has been any effort on part of the central government to dilute the nature and spirit of cooperative federalism. I’ll give you a broad number. The gross revenue receipt for the five-year period comes to roughly Rs 154-155 trillion, according to our calculation. When we go to gross tax receipts, it comes to Rs 134 trillion over the five-year period. Then, coming to the size of the divisible pool, it shrinks to Rs 101 trillion. So the 41 per cent devolution to the state already gives them about Rs 42 trillion as revenues. Add to that the Rs 2.94 trillion on account of the revenue deficit grants, the over Rs 4 trillion additional grants for disaster management, which appears to evenly balance the fiscal space of the Centre and the states. So, there has been no undercutting of federalism as far as the financial part of the development is concerned. Now, there are other aspects to the nature of relationship such as the federal partnership for handling the worst pandemic in 100 years. Looking at that, I think this partnership has already strengthened. But, the fact is that we need to revisit the seventh schedule of the Constitution, which is part of the problem. There is ambiguity on subjects within the domain of the states those in the domain of the central government.This definition has outlived its utility. It has been overtaken by subsequent events. The second issue is the use or misuse of Article 282 of the Constitution, under which many centrally sponsored schemes and central outlays have been undertaken. Based on our recommendations, the finance minister mentioned in the budget speech that she intended do to a major restructuring of the CSS and central outlays.

You have recommended a leaner GST rate structure and said that the annual GST revenue shortfall is about Rs 4 trillion. By when do you estimate revenues to neutralise after the rate rationalisation exercise?

This is a hypothetical question, because the decisions on these matters rest only with the constitutional body–the GST Council. However, we have made a number of suggestions on rationalisation of processes and procedures, and most of them have been adopted in the finance ministers’ budget speech, including invoice matching, minimising invoice manipulation, strengthening the technology platform to improve the quality of compliance. This has already had a very virtuous multiplier effect because if you see the performance of GST for the last few months, it has been fairly robust. So these are in the domain of processes and procedures on which action is substantially underway, and you will see that as these improve the GST outcome on the revenue side also improves. Going beyond that is a broader issue of the restructuring of the GST itself. You need much greater broad banding. You need to have an ideal, what some people have argued , a single rate. But that may not be practical. So I think perhaps what would be practical is maybe a much narrower band of three rates of the standard rate, the demerit rate and the merit rate. Then, there is an issue of moving towards a revenue neutral rate. A significant part of this rate rationalization and broad banding may not really result in greater burden on the consumer. In fact, if you do imaginative reclassification, you will see very significant benefits to all stakeholders– the consumers, state government, and to the central government.

While the Centre has accepted your recommendations on a glide path for states on fiscal deficit, it has not totally accepted the path for the Centre and capped its fiscal deficit at 4.5 per cent in the terminal year as against the recommendation of 4 per cent.

As far as the central government is concerned, I must compliment it for coming up with this figure of 9.5 per cent of GDP for the current financial year. I struggled very hard as chairman of the FRBM committee to come up with a more transparent system of accounting. For the first time off-budget borrowings and further contingent liabilities, subterfuge methods to mask the actual incidents have been dealt with by the letter and spirit of the FRBM, namely, the transparent accounting itself. Then on the glide path, it is only somewhat marginally elevated. There is a lot of merit in undertaking fiscal policies, which are counter cyclical. It’s not as if this did not come up in the FRBM committee’s deliberations, putting my earlier hat on. We had considered a range, instead of a fixed point. But at that time we suggested a fixed one because in parliamentary democracies, there would be a tendency to operate at the upper-end of that. But these are exceptional times, which you need to give them a range instead of a point. Also we had considered the issue of how to make the fiscal numbers in symmetry with the cycle,and counter cyclical action and they had considered not a very significant departure, in my view as 0.5% at the end of the terminal period does not look unnatural. These would have to be again calibrated as you go along based on the recovery process, depending on not only the next year, but the subsequent years. The big thing on debt sustainability is whether growth is going up or not if interest rates remain more or less predictable. We have suggested the constitution of an inter-governmental group to recalibrate and redraw a new fiscal consolidation roadmap.The big thing on debt sustainability is whether growth is going up or not if interest rates remain more or less predictable. We have suggested the constitution of an inter-governmental group to recalibrate and redraw a new fiscal consolidation roadmap.The big thing on debt sustainability is whether growth is going up or not if interest rates remain more or less predictable.

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