No fiscal road map is meaningful without states: NK Singh – The Economic Times

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Synopsis–“Need a path that involves both Centre and states on fiscal deficit and debt; have suggested the constitution of an inter-governmental body of centre and the states,” said NK Singh.

No fiscal roadmap or debt roadmap is meaningful unless it is for the general government, meaning both the Centre and states, according to 15th Finance Commission chairman NK Singh. In an interview with Gaurav Noronha and Deepshikha Sikarwar, he said the commission had recognised the need for flexibility in fiscal framework. Edited excerpts :

The FC has suggested a fiscal roadmap. The government is targeting a 4.5% deficit by FY26, but plans to bring in a new framework. What kind of a framework should we have?
One of the serious infirmities of the FRBM Act of 2018 was that it concerned the central government. States were not part of that process. No fiscal roadmap or debt roadmap is meaningful unless it is for the general government, meaning both the Centre and the states. So, we have suggested the constitution of an inter-governmental body of centre and the states. Second, there is a growing recognition on the part of domain thinkers that the paradigms on some of the fiscal norms need to be revisited. Some movement away from fiscal fetishness to fiscal flexibility. That is why we have not given fixed (fiscal deficit) points, either for the central government, or for the states. Sometimes, a fixed point can lead you to pro-cyclical behaviour, which would worsen the crisis. Another important change is emphasis on the need for much greater transparency in the accounting framework. One of the very big issues used to be if the numbers were credible? The budget makes a truly sincere attempt to make the process transparent. I would say broad contours of a fiscal consolidation roadmap need to recognise the ongoing pandemic, long-term consequences to destruction of wealth globally and the global economic responses and our own compulsions of trying to achieve the potential rates of growth.

The exposure of states to the power sector is a contingent liability. Should that not get higher attention going ahead in terms of transparency?
All the 28 states we visited, the one giant elephant in the room is the power sector, the unpaid liabilities of power discoms. In the fiscal roadmap, we made 0.5% extra borrowings by the states contingent on the fulfilment of performance criteria — mainly, the unpaid liabilities of discoms and improving the working of these companies in terms of billing cycles, the working of power regulators, getting away from regulatory capture and enabling them to meet their finances. And we have also suggested a carry forward, that if you undertake all these measures, then if you have not been able to raise this money in that year, we have allowed a carry forward of the borrowing ability from one year to another, within the period of our award from FY21 to FY26.

On GST, many experts have suggested widening of the base and fewer slabs…
There are two types of broad issues. First are those that deal with the procedural and process simplifications. These are better invoice matching, preventing invoice manipulation, improving quality of compliance and better technology platform. If you see the finance minister’s speech, several of them (suggestions) have been fully accepted. There are other more important structural issues. These relate to doing away with inverted duty structure, broad-banding of rates. You can’t have the ideal, one rate. In a complex country like India, I think that is somewhat elusive. But let’s say having three rates, the standard rate, a clear merit rate and a clear demerit rate, so broad-banding in terms of a three-rate structure. Then, decreasing or moving towards a genuinely revenue neutral rate, which does not mean increasing the rates. We have given some indication of this. And then, finally, predictability and stability on the rate structure. It should be certainly for one year, if not longer.

States have had issues with imposition of cesses, because they don’t get a share. This budget introduced a new cess with reduction in customs duty. How do you see that?
We are not the first finance commission to encounter this problem. The 12th, the 13th and certainly the 14th also commented extensively and wrote with great passion on the issue of cess and surcharge. We have followed that same track. Based on the modelling, which we did, the total size of what is known as the gross revenue receipts (GRR), in a five-year period would be about Rs 154 lakh crore. From the GRR, you take out things like the RBI dividend to the government, you take out spectrum-related revenues and other things, you come to the gross tax revenue (GTR) of the government. So that comes down to Rs 134 lakh crore. Now, from the GTR, you get to the divisible pool, which becomes only Rs 103 lakh crore. The divisible pool has shrunk on account of cess, surcharges and other liabilities. Also, the cess and surcharge issue is part of the Constitution. The finance commission is only concerned with the divisible pool, but these are outside of the divisible pool. So, apart from commenting on the fact this tendency of shrinking the divisible pool acts deleterious to the states, there’s nothing which we can do. It will require a constitutional amendment, which will require a much wider debate.
( Originally published on Feb 10, 2021 )

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