Finance Commission

Modi Tried to Surreptitiously Cut States’ Share of Central Taxes in 2014: Report

The prime minister reportedly had to back off because the then head of the Finance Commission, Y.V. Reddy, resisted.

New Delhi: Soon after he came to power in 2014, Prime Minister Narendra Modi tried to significantly cut states’ access to funds using backdoor negotiations with the Finance Commission of India, a new exposé from The Reporters’ Collective published in Al Jazeera has found. However, Modi had to back off because the then head of the commission, Y.V. Reddy, resisted.

“The Finance Commission’s firm stance forced the Modi government to hastily redo its maiden full budget in 48 hours and slash funding across welfare programmes since its assumption of retaining a greater portion of the central taxes did not pan out,” Al Jazeera‘s report notes.

B.V.R. Subrahmanyam, CEO of the Modi government-created government think-tank NITI Aayog, revealed this back-and-forth at a talk organised by the Centre for Social and Economic Progress last year. He said in that talk that Union government budgets are “covered in layers and layers of attempt to cover the truth”. He added that he was “sure you will have a Hindenburg who will open up the [Indian government’s] accounts if they are transparent”.

The video of this talk was available on YouTube, but was pulled down soon after The Reporters’ Collective sent a questionnaire on the subject to the Prime Minister’s Office. The journalists independently verified these claims using documents and the budget.

Al Jazeera reports:

“In its report that it submitted in December 2014, the commission recommended that states should get 42 percent of the share of central taxes, up from the 32 percent they had been receiving until then. But Modi, now the prime minister, and his Ministry of Finance, wanted to keep the states’ share of taxes down at 33 percent and a larger portion for the federal government.

Under the constitutional provisions, the government has only two options: accept the Finance Commission’s recommendations or reject them and establish a new commission. It cannot argue, debate or negotiate with it formally or informally.

But the prime minister tried off-record parleys to get the chairman of the Finance Commission, YV Reddy, who was earlier the governor of the Reserve Bank of India, to pare down his recommendations on the revenue share. In his comments on the panel, Subrahmanyam said he was the only other person in that conversation.

This was in breach of constitutional propriety. If the government had succeeded, it would be able to reduce the states’ income while passing the blame onto the constitutional body, the commission.

Subrahmanyam said that a “tripartite discussion between Dr Reddy, me and the prime minister” about the figure took place.

“No Finance Ministry [official or minister],” he stressed, was involved. “Should it be 42 [percent] or 32 [percent] or some number in between? The previous number was 32,” he said, referring to the percentage share of taxes recommended by the 13th Finance Commission.

The conversation lasted two hours, Sabrahmanyam said, but Reddy was unyielding. Subrahmanyam recalled Reddy, telling him in “good south Indian English: ‘Appa [Brother], go and tell your boss [the prime minister] that he has no choice’.”

The government had to accept the Finance Commission’s recommendations of 42 percent.”

Despite these failed backdoor negotiations, Modi hid from parliament that he had tried to reduce states’ share of taxes. He said in parliament on February 27, 2015, “To strengthen the nation, we have to strengthen the states… There is a dispute among Finance Commission members. We could have taken advantage of that. We didn’t. But it is our commitment that states should be enriched, should be strengthened. We gave them 42 percent devolution.”

Amid India’s Silent Fiscal Crisis and Fragile Federalism, 16th Finance Commission Has an Uphill Task

At a time when the federal faith in Centre-state relations is at its weakest link and remains deeply politicised, it would be interesting to see how Aravind Panagariya and his team go ahead with the difficult work cut out for them.

Arvind Panagariya has been recently appointed as the head of the 16th Finance Commission, a constitutional body appointed by the President of India, to give suggestions on Centre-state financial relations.

At a time when the federal faith in Centre-state relations is at its weakest link and remains deeply politicised, it would be interesting to see how Panagariya and his team at the Finance Commission go ahead with the difficult work cut out for them.

The 15th Finance Commission under chariman N.K. Singh was required to submit two reports at the time. The first report, consisting of recommendations for the financial year 2020-21, was tabled in parliament in February 2020. The final report with recommendations for the 2021-26 period was tabled in parliament on February 1, 2021.

Some key recommendations from these reports may be worth reiterating:

Devolution and share of states

The share of states in the central taxes for the 2021-26 period was recommended to be 41%, the same as that for 2020- 21. This is less than the 42% share recommended by the 14th Finance Commission for the 2015-20 period.

Table 1 below shows the criteria used by the Commission to determine each state’s share in central taxes, and the weight assigned to each criterion.

The criteria for the distribution of central taxes among states for the 2021-26 period is the same as that for 2020-21. However, the reference period for computing criteria like income distance and tax efforts are different (2015-18 for 2020-21 and 2016-19 for 2021-26), hence, the individual share of states may still change.

The use of ‘income distance’ reflects how a given state with a lower per capita income will have a larger share assigned in the devolution of funds to maintain equity with other states. On ‘demographic performance’, this criterion has been used to reward efforts made by states in controlling their population. States with a lower fertility ratio will be scored higher on this criterion. On ‘Tax and fiscal efforts’, this criterion has been used to reward states with higher tax collection efficiency. It is measured as the ratio of the average per capita own tax revenue and the average per capita state GDP during the three years between 2016-17 and 2018-19.

In principle, these are all good incentive markers in assigning devolution of funds for states while promoting developmental possibilities for internal state action and collective measures and enable their performance on different social indicators.

For example, on health alone, the Finance Commission reports suggested states increase spending on health to more than 8% of their budget by 2022. Primary healthcare expenditure should be two-thirds of the total health expenditure by 2022. Centrally sponsored schemes (CSS) in health should be flexible enough to allow states to adapt and innovate. The focus of CSS in health should be shifted from inputs to outcome.

On creating a fiscal consolidation roadmap for states to follow

The earlier Finance Commissions had suggested that the Centre bring down the fiscal deficit to 4% of GDP by 2025-26. For states, it recommended the fiscal deficit limit (as % of GSDP) of: (i) 4% in 2021-22, (ii) 3.5% in 2022-23, and (iii) 3% during 2023-26.

“If a state is unable to fully utilise the sanctioned borrowing limit as specified above during the first four years (2021- 25), it can avail the unutilised borrowing amount (calculated in rupees) in subsequent years (within the 2021-26 period). Extra annual borrowing worth 0.5% of GSDP will be allowed to states during the first four years (2021-25) upon undertaking power sector reforms including: (i) reduction in operational losses, (ii) reduction in revenue gap, (iii) reduction in payment of cash subsidy by adopting direct benefit transfer, and (iv) reduction in tariff subsidy as a percentage of revenue.”

The Commission also observed that the recommended path for fiscal deficit for the Centre and states will result in a reduction of total liabilities of: (i) the Centre from 62.9% of GDP in 2020-21 to 56.6% in 2025-26, and (ii) the states on aggregate from 33.1% of GDP in 2020-21 to 32.5% by 2025-26. It recommended forming a high-powered inter-governmental group to: (i) review the Fiscal Responsibility and Budget Management Act (FRBM), (ii) recommend a new FRBM framework for centre as well as states, and oversee its implementation.

Also read: ‘Why the 16th Finance Commission’s Struggles Will Be Significant’

The ‘real’ context

But there are recommendations made by a constitutionally safeguarded Commission then there are realities that have a different social, political, and economic context layered to it.

The political economy of actual fiscal devolution observed over the last few years has been that of extensive ‘politicisation’ by the Modi Government. Economic or social criteria are hardly shaping the way the Union transfers funds to states.

As argued recently, this has been observed in the way the Modi government has squeezed some states’ fiscal freedom to borrow. In the backdrop of the grave financial crisis that state governments are facing currently, Kerala finance minister K.N. Balagopal said his state’s net borrowing limits have been reduced by Rs 4,000 crore.

The Union government’s coercive attitude remains consistent in its treatment – and interpretation of clauses – with most non-BJP ruled states too. Recently, the Telangana and Tamil Nadu governments too made similar observations about the need to preserve constitutionally safeguarded state autonomy in being able to manage its fiscal priorities (including for borrowings made).

This results in a trust deficit between the Centre and states and makes the task of any Finance Commission recommendations to be followed extremely difficult. Irrespective of what the FC says, the Union government can hardly be trusted at this point to see the recommendations being realised when it becomes to processing (and following) actual transfers.

The numbers below also reflect the contemporary realities of Centre-state finances.

On the actual devolution of funds in Centre-state financial relations

Our research team at InfoSphere, Centre for New Economics Studies (CNES), O.P. Jindal Global University, recently completed a study observing the Centre-state fiscal relationship more closely. A detailed version of our findings was earlier discussed here.

The factsheet shared by the ministry of finance triggered a further investigation by our team studying the available data (from 2019 onwards) on tax devolution – the share from Centre to state governments, drawn from government sources.

Some observations follow:

Source: Authors Calculations (InfoSphere, CNES)

The figure above presents the overall net tax devolution proceeds (in Rs. crores) from the year 2019 onwards transferred by the Union government to all state governments. These exclude Union territories (UTs) from our list.

The figure (above) gives a macro-trend of the tax devolution from the Centre on a year-to-year basis. This is a function of the accrued fiscal revenue capacity of the Central government over the last few years. The pandemic year (2020-21) was tough for the fiscal purse of the government as a whole and as a result, saw the lowest tax devolution level from the Centre to states.

This, in fact, made more states to borrow extensively to cover healthcare – and other pandemic-induced costs from these ‘borrowed resources’, thereby, as a result, seeing their fiscal deficit-debt levels rise. As argued earlier, there has been increasing evidence of the Union government arbitrarily squeezing the borrowing power of certain states, currently governed by opposition parties. Most state finance ministers have put this on the record.

The figures below provide a ‘select’ look at the Centre to state tax devolution levels for a few opposition-governed versus BJP-governed states (refer here for source on this).

States like Bihar and Uttar Pradesh get most of the tax-devolution share from the Centre- largely because of their spatial, demographic, and socio-economic needs. States like Haryana, Punjab, and Kerala haven’t seen any critical growth in their tax-devolution share over the last five years.

It is pertinent to note, how each of these states, has also seen its worst fiscal position scenario – accompanied by a decline in GSDP levels over these years too (worsening since the pandemic), which warranted a more interventionist, counter-cyclical fiscal support from the Centre.

Further, states like Tamil Nadu, Chhattisgarh, Himachal Pradesh, and Uttarakhand, haven’t seen any drastic shift in their net-devolution share too, even though states like Tamil Nadu- given their strong GSDP position contribute a lot more to Central Government’s tax-revenue share.

On the states’ fiscal position and debt landscape

One of the key areas for the 16th Finance Commission (headed by Panagriya) would be to also provide a suitable fiscal consolidation strategy for high-debt affected states to reduce their indebtedness while balancing their spending priorities and welfare needs.

A few debt numbers below provide an illustrative account of Indian states’ fiscal position. The debt-to-GDP ratio at the state level is crucial for assessing specific financial conditions and policies. This localised ratio significantly influences credit ratings, budget decisions, and fiscal strategies, allowing states to uphold long-term financial stability and responsible fiscal management. Calculated by dividing a state’s total outstanding debt by its GDP and multiplied by 100 to express it as a percentage, monitoring and managing this ratio empowers states to make informed economic policy choices.

Outstanding debt to GDP percentage for Indian states

Mizoram currently grapples with the highest debt-to-GDP ratio among Indian states, standing at 53%, according to recent budget estimates. Following closely are the states of Punjab and Nagaland with ratios of 44% and 47%, respectively. Several factors contribute to the escalation of the debt-to-GDP ratio in Indian states. Notably, investments in infrastructure development, social welfare programmes, and public services can strain state finances.

The state of Odisha maintains a low level of accrued debt by adhering to a stricter fiscal discipline. The state abides by annual budget deficit targets, averting elevated interest rates and decreasing borrowing expenses. Odisha’s performance is primarily ascribed to its savvy control of expenditures rather than its ability to generate money, considering the limited opportunities for the latter.

Although the state is a key producer of paddy, it manages to avoid incurring a substantial subsidy cost, unlike Punjab, which has unpredictable rainfall patterns while producing a substantial amount of India’s wheat. Odisha’s capacity to uphold budgeted spending without making compromises, especially in the face of economic constraints, enhances the maintenance of fiscal discipline. Conversely, Punjab is experiencing strain on various fiscal fronts, which underscores the contrasting financial approaches among different states in India.

As observed for Assam, increasing debt has been driven by loans for development projects, sourced from financial institutions and the Central government.

Critics from the opposition argue that chief minister Himanta Biswa Sarma’s populist measures are exacerbating the financial pressure. Concerns have arisen due to outstanding payments to contractors and a legislative decision to elevate the debt-to-GSDP ratio.

The Comptroller and Auditor General’s criticism emphasises the need for enhanced fiscal management, urging the state to address challenges in meeting repayment commitments and curbing the expansion of public debt.

State-market borrowings

As seen above there has been a 250% increase in market borrowings for the state of Himachal Pradesh – the surge in market borrowing in Himachal Pradesh is associated with fiscal mismanagement under the previous BJP administration, favouring extensive borrowings over resource mobilisation.

Deputy chief minister Mukesh Agnihotri ascribes the state’s precarious financial condition to the Union government’s lack of supportive measures, denying additional resources. The current government inherited significant direct liabilities, primarily debt, leading Himachal Pradesh to be ranked as the fifth highest debt-stressed state by the Reserve Bank of India. The White Paper underscores the difficulties posed by amassed liabilities, indicating a challenging fiscal landscape.

Madhya Pradesh and Punjab, as noted earlier, are also grappling with elevated market borrowing to address their respective state expenditures. In Madhya Pradesh, the financial scenario suggests challenges akin to Himachal Pradesh.

The state’s reliance on market borrowing may stem from a combination of factors, including fiscal policies, developmental initiatives, and economic considerations. Similarly, Punjab faces significant market borrowing, potentially influenced by factors such as infrastructure projects, social welfare programs, or economic exigencies. Both states need to carefully manage their borrowing strategies, considering long-term fiscal implications and economic

What do we learn?

A lack of vision in the medium to long-term fiscal policy approach, from the Union government’s tax-based disbursements has therefore inadequately addressed this challenge/question: What role has the Union government, which, by law and constitutional power, is assigned more fiscal capacity and discretion to raise and spend tax-based revenue resources, played in supporting states through spending?

What one broadly sees in these trends are three broader, consequential categorical imperatives:

1. The Union government has merely maintained the status quo when it comes to giving states ‘what they need’, they haven’t transferred more, or envisioned to transfer more tax revenue to enable a given state’s own welfare or growth needs/revenue requirements.

The available data on transfers for both BJP-governed and non-BJP-governed states tell a tragic tale of a lopsided growth pattern evident across states, which is more of a continuum from the past, than seeing/realising change. This raises a more troubling question (for point b)

2. What this says is the Union government under the Modi administration (since the last few years, read 2019 onwards from our data) has increasingly seen a gradual erosion in its fiscal capacity and will support states, which need more revenue for growth and welfare requirements.

This fact subsequently has little to do with the political parties governing the states, but over time, the larger issue has become more aligned with the Union government’s own poor revenue collection capacity (i.e. failing to collect the revenue what the Central Government projects in its own Union Budget estimate).

2. Poor quality government data makes it extremely difficult for anyone to effectively analyse the potential gains/losses being made from the allocated tax-devolution proceeds shared by the Central Government for States over the last few years.

See the RBI Handbook of Statistics here, for data on GSDP (2008-09 is the last year mentioned), or for Poverty (the last year mentioned because the last Census remains 2000-2002). The current administration, it seems, has done everything in its power to not even collect ‘good’ data which can help recognise fiscal challenges/potentials, to strengthen policy for a long term good.

This is a marked sign of a ‘fiscally weak’ and ‘insecure’ government, which is content to project empty riddles of economic ‘optimism’ built merely around rhetorical hope, pasting ‘India Shining data’ on relative comparisons of ‘good growth performance’ (made with countries industrially far more advanced and at a higher order of development), but underneath its own core, India suffers from a ‘silent fiscal crisis’ and under ‘poor macroeconomic fundamentals’.

These indicate an economy moving towards a state of permanent decline, sourced from structural weakness, in which any Union government will be able to do (fiscally) very little for states even if they want to do more (assuming there is a willingness to do so).

Deepanshu Mohan is a professor of economics and director, the Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities, OP Jindal Global University.

‘Why the 16th Finance Commission’s Struggles Will Be Significant’

In a Business Standard opinion piece, Rathin Roy, who heads the Overseas Development Institute in London, has highlighted the role of political and institutional contestations on intergovernmental fiscal relations.

New Delhi: In an opinion piece on Business Standard, Rathin Roy, who heads the Overseas Development Institute in London, has highlighted that the 16th Finance Commission to be notified soon by the Union government will face significant challenges caused by political and institutional contestations of intergovernmental fiscal relations.

These, he writes, make business untenable.

In September, reports had said that the Union government is working to set up the 16th Finance Commission. This commission is tasked with fine-tuning how resources are shared between the Union government and the states. This finance commission’s term, however, is till 2026.

Roy notes how the 14th Finance Commission report abolished grants and increased devolution of funds to states, which was then followed by the Union government to promote cooperative federalism. “Over time, this has reversed, ” he noted, highlighting how the abolition of the Planning Commission has given the Union finance ministry supreme discretionary powers over capital grants.

While authoritarian, Roy notes that this government signifies a weak sort of authoritarianism, citing the transfer of government audit officials who pointed out problems with flagship welfare schemes.

The report of the 15th Finance Commission, Roy calls an “embarrassment.” He wrote that it lacked understanding and tried to corner central spending on defence.

For the 16th Finance Commission, he notes, the states are higher as central fiscal deficit is at a record high, tax revenue increase efforts have failed and total public sector capital expenditure has not increased. Roy points to the ways in which the Union government has been depriving states of their rightful shares.

In his piece, Roy also calls for prudent allocation of tax revenues among states and a fresh look at the Goods and Services Tax to make it more workable.

Ultimately, Roy calls on the government to constitute the 16th Finance Commission “sensitively.”

‘Irrational Freebies’ from Parties a ‘Serious’ Matter: SC Asks Centre to Take a Stand

“I am asking whether the Government of India is considering it a serious issue or not? Why are you hesitating to take a stand?”

New Delhi: Terming as “serious” the promise of “irrational freebies” made by political parties during elections, the Supreme Court on Tuesday wondered why the Centre was hesitant about taking a stand on the issue.

The court also asked the Centre whether the view of the Finance Commission can been sought to deal with the issue after the Election Commission said it cannot regulate political parties on it.

“Why don’t you say that you have nothing to do with it and the Election Commission has to take a call. I am asking whether the Government of India is considering it a serious issue or not? Why are you hesitating to take a stand? You take a stand and then we will decide whether these freebies are to be continued or not. You file a detailed counter (affidavit),” Chief Justice of India N.V. Ramana told Additional Solicitor General K.M. Natraj.

The bench, also comprising Justices Krishna Murari and Hima Kohli, was hearing a PIL against the practice of political parties promising freebies during elections. The petitioner wanted the Election Commission to invoke its powers to freeze their election symbols and cancel their registration.

The bench, during the brief hearing, sought the views of senior advocate and Rajya Sabha MP Kapil Sibal, who was in the courtroom in connection with another matter, on the issue of freebies made during and after polls.

“This is a serious matter. Truly serious! The solutions are very difficult but the issue is extremely serious. It is the Finance Commission which gives out allocation to the states… they can take into account the debt of a state and the quantum of freebies.

“Finance commission is the appropriate authority to deal with it. Maybe we can invite the commission to look into this aspect. We cannot expect the Government of India to issue directions to states. This is not possible and this will create a political issue,” Sibal said.

Sibal said the Finance Commission can take an informed view with regard to freebies, their quantum and the financial condition of the state where the promises are sought to be implemented.

“Please find out from the Finance Commission as to whether this takes place. You find out who is the authority where we can initiate a debate or something. I will list it next week. We direct the Government of India to get instructions in this matter…,” the CJI told the ASG.

At the outset, the counsel for the Election Commission referred to the reply filed in the matter and said that offering freebies before polls and their execution after the results are the policy decisions of political parties, and the Central government and not the poll panel, will be the best suited for dealing with this issue.

The poll panel cannot regulate state policies and decisions which may be taken by the winning party when they form the government, the counsel for the EC said.

On the other hand, the ASG insisted the issue needed to be dealt with by the EC.

Calling the matter serious, the bench asked the government not to hesitate from taking a stand.

Lawyer Ashwini Upadhyay, who has filed the PIL, said the poll panel has the power to de-recognise and seize the symbol of political parties and they can be used to stop doling out of irrational freebies.

He referred to the recent Punjab assembly election and said the state, which is precariously placed financially, has to bear the burden of the promises.

“We are on our way to becoming Sri Lanka,” he warned.

The top court had on January 25 sought replies from the Centre and the Election Commission on the PIL seeking direction to seize the symbol or deregister a political party that promises or distributes “irrational freebies” before polls, saying it is a “serious issue” as sometimes freebie budget is going beyond regular budget .

The plea, which was filed ahead of the assembly polls in five states including Punjab, said there should be a total ban on such populist measures to gain undue political favour from voters as they violate the Constitution, and the EC should take suitable deterrent measures.

While issuing the notice, the bench had taken note of the submissions of senior advocate Vikas Singh, appearing for Upadhyay, that a law was required to be framed and steps taken for seizure of party symbols or cancellation of registration of parties or both as ultimately it is the citizens who have to pay up.

The plea urged the court to declare that the promise of irrational freebies from public funds before elections unduly influences the voters, disturbs the level playing field and vitiates the purity of the poll process.

“Petitioner submits that the recent trend of political parties to influence voters by offering freebies with an eye on elections is not only the greatest threat to the survival of democratic values but also injures the spirit of the Constitution,” said the plea.

“This unethical practice is just like giving bribes to the electorate at the cost of the exchequer to stay in power and must be avoided to preserve democratic principles and practices,” it said.

The petition has also sought a direction to the EC to insert an additional condition in the relevant paragraphs of the Election Symbols (Reservation and Allotment) Order 1968, which deals with conditions for recognition as a state party, that a “political party shall not promise/distribute irrational freebies from the public fund before the election”.

The petitioner has urged the apex court to declare that the promise or distribution of private goods or services, which are not for public purposes from public funds, before the elections, violates several articles of the Constitution, including Article 14 (equality before law).

(With PTI inputs)

BJP Names Candidates for Third, Fourth Phases of Bengal Assembly Polls

The BJP has fielded a Union minister, three sitting MPs, a noted economist and several film personalities for the high-stakes battle in the state.

New Delhi/Kolkata: The Bharatiya Janata Party (BJP) on Sunday came out with the names of 63 candidates for the third and fourth phases of assembly polls in West Bengal, nominating four MPs including Union minister Babul Supriyo and several new faces, triggering protests and resignations in various parts of the state.

In a surprise move, the party nominated Trinamool Congress (TMC) turncoat and octogenarian sitting MLA of Singur, Rabindranath Bhattacharya. Of late, the BJP has not been nominating such elderly persons as poll candidates.

Addressing a press conference at the BJP headquarters in New Delhi, party general secretary Arun Singh and Union ministers Supriyo and Debasree Chaudhuri released the names of 63 candidates for West Bengal assembly polls.

For the high-stakes battle in the state, the BJP has fielded a Union minister, three sitting MPs, a noted economist and several film personalities. The list also has seven women candidates and eight turncoats, including former state minister and TMC leader Rajib Banerjee, who had recently quit the party to join the saffron camp. The list does not feature any candidate from the minority community.

Also read: Rakesh Tikait, Medha Patkar Share Stage in Nandigram, Ask People to Defeat BJP

While Supriyo, the Union minister of state for environment, forest and climate change, was nominated from the Tollygunge seat in Kolkata, Lok Sabha MPs Nisith Pramanik and Locket Chatterjee have been selected for Dinhata and Chunchura constituencies respectively.

Pramanik and Chatterjee, a former actor, have been fielded from assembly constituencies that come under their respective Lok Sabha seats. However, Supriyo has been nominated for a seat far away from his Lok Sabha constituency Asansol in Paschim Bardhaman district. He is pitted against senior TMC leader and minister Aroop Biswas.

Senior journalist and Rajya Sabha MP Swapan Dasgupta is the BJP’s nominee for the Tarakeshwar assembly segment. Outgoing MLA of Singur and octogenarian leader Rabindranath Bhattacharya, who had crossed over from the Trinamool Congress after it denied him the ticket due to age factor, has been fielded from the same seat by the BJP.

Besides Chatterjee, the party has given a ticket to film actors such as Tanushree Chakraborty from Shyampur in Howrah district and Payel Sarkar from Behala Purba in Kolkata. Actor Yash Dasgupta has also been nominated from Chanditala in Hooghly district.

Also read: Former BJP Leader Yashwant Sinha Joins TMC Ahead of West Bengal Assembly Polls

The BJP also nominated former chief economic advisor to the government, Ashok Lahiri, from the Alipurduar seat in North Bengal. He has also served as the chairman of the Kolkata-based Bandhan Bank and was a member of the Finance Commission from 2017 to 2020.

By fielding columnist Dasgupta and the economist Lahiri, the BJP has sought to impress the sophisticated Bhadralok community of the eastern state, political observers said, noting the Bengali intelligentsia refrained from backing the saffron party in 2019 Lok Sabha polls despite a large consolidation of Hindu votes around it.

Hours after the candidates’ names were announced, the rift between old-timers and newcomers in West Bengal BJP came out in the open as several aspirants voiced their anguish against the party and resigned after they were denied tickets, while protests were held across the state.

BJP leader and TMC turncoat Sovan Chattopadhyay along with his friend Baisakhi Bandyopadhyay quit the party after both of them were denied tickets. Chatterjee’s constituency for several decades, Behala Purba, was given to actor-turned-politician Payel Sarkar, who joined the party a few days back. In his resignation letter to the party’s state president Dilip Ghosh, Chattopadhyay accused the saffron camp of humiliating him.

Also read: ‘Conspiracy by BJP’: TMC’s Memorandum to EC Seeks Probe into ‘Attack’ on Mamata Banerjee

The nomination of Ashok Lahiri from the Alipurduar seat and Gorkha Janmukti Morcha turncoat Bishal Lama from Kalchini triggered a wave of protests in North Bengal with the local leadership hitting the streets. In Hooghly district’s Singur assembly constituency, BJP supporters locked up party functionaries over the nomination of TMC turncoat and sitting MLA Rabindranath Bhattacharya. Angry BJP workers ransacked a party office in Panchla seat in Howrah district, where TMC turncoat Mohitlal Ghati was given the poll ticket.

Rantideb Sengupta, who was fielded from Howrah Dakshin seat, declined to contest after the list was announced, citing personal reasons. However, the central leadership of the party intervened and persuaded him to contest from the constituency.

Protests were also held in various other constituencies after ticket aspirants didn’t find their names in the list. Shyampur is one such constituency where actor Tanushree Chakraborty, a newcomer in the BJP, was nominated. Several district-level leaders also resigned from the party after failing to get tickets.

The BJP’s Bengal leadership said that they would look into the matter and the issues would be resolved through discussions.

Elections to the 294-member West Bengal Assembly will be conducted in eight phases between March 27, 2021 and April 29, 2021. The counting of votes will take place on May 2, 2021.

Fifteenth Finance Commission and the Muddied Financial Response to COVID-19

Criteria formulated by the commission before the current crisis ended up deciding how much money each state got from the SDMRF.

On March 14, the Ministry of Home Affairs declared COVID-19 a notified disaster. This meant state governments could draw from the State Disaster Risk Management Fund (SDRMF) for relief measures during lockdown. It’s a useful announcement by any yardstick, given states are desperately short of funds. The devil, however, as always, is in the details.

If one looks at how much each state was eventually allotted under the SDRMF to fight COVID-19 and the aftereffects of the lockdowns, Kerala, one of the worst-affected states, got a mere Rs 157 crore. At the other end, Maharashtra got Rs 1,611 crore.

At least Maharashtra has had the highest number of confirmed COVID-19 cases and is a much larger state with a much larger population compared to Kerala. Himachal Pradesh, Punjab, Haryana and a few other states that are smaller than Kerala in both size and population, and have a fewer number of confirmed cases, got a much higher allocation.

How did this happen? After all, one purpose of fund disbursal, according to the MHA circular, is for states to also help migrants. Kerala is a state that has a large migrant population. Odisha, a state with far fewer confirmed cases and migrants, was allotted Rs 802 crore, that’s 5x of Kerala’s allocation. To understand the problems and reasoning behind these allocations, it’s useful to look at both the actual allocation for each state and the confirmed cases in that state (as of April 4), together.

If we wanted an even starker way of looking at this allocation, it’s useful to look at the allocation for each state on a per confirmed COVID-19 case. The severity of this pandemic is measured, at least in some ways, by looking at how many people have been infected thus far. So, if all other things are equal, it’s fair to assume, there should be some parity in the funds allocated per infected patient across states. Even if there’s disparity, as it happens in a diverse country, one’d expect the numbers to be in the same ballpark. Except, these allocations are so off the charts that one is tempted to quote Jules from Pulp Fiction to say, “they ain’t even the same sport.”

Also read: The Destruction of Fiscal Federalism

Kerala gets Rs 53 lakh per patient while Odisha gets some Rs 160 crore**. The southern states get the least allocation when measured thus.

To understand the allocations this time for the COVID-19 crisis, one needs to look at the absolute numbers and the ratios that were suggested for this fund by the 15th Finance Commission when its report was tabled in Parliament along with the Budget earlier this year.

The total SDRMF allocation for the year 2020-21 is Rs 28,983 crore. The current release for the COVID-19 response is Rs 11,092 crore; this amount is divided in the ratio recommended by the 15th Finance Commission. The fund’s allocation formula was tweaked and a new structure was recommended by the 15th Finance Commission before the COVID-19 crisis. Its results, in this context, are strange, tending to the absurd.

Kerala, as one can see, is just above Arunachal Pradesh in terms of actual allocation. In absolute terms, the state has an allocation that’s less than several states which are both geographically smaller and have fewer people. Furthermore, Maharashtra corners the lion’s share in absolute terms. As do states like Odisha, Madhya Pradesh and Rajasthan.

To understand how this allocation works, one needs to read the Annexure 6.2 of the report of the 15th Finance Commission. Buried there is the detail on how this calculation works. Firstly they take the previous expenditures of the states under SDRF. They adjust this for inflation. Call it ‘AE’.

Then, add the parameters of area (call this ‘A’) of the state and its population (call this ‘P’). Call the sum of these weighted terms, with ‘A’ and ‘P’ getting 15% weights each while ‘AE’ gets 70% weight, ‘W’. This value ‘W’ is then multiplied by something called the Disaster Risk Index (DRI); call this new value ‘Y’. Take that value, and add this again to W!***

Also read: Centre Granting Flexibility to States Is Crucial to India’s Development

Why this formula was chosen is something that is not explained in detail in the report. How this’d work is also not explained. Why the factors for population and area were added and how the weights were arrived at is also not explained; unless the declarations that these are good things to add counts as an explanation.

The DRI appears to be another arbitrarily constructed index with no real explanation on how the weights for various natural disasters were arrived at.

DRI scores. Credit: 15th Finance Commission.

The problem here is that the commission’s formulas don’t apply well to the COVID-19 context. Not only do they not pass the smell test, they throw up allocations that are absurd. Any reasonable set of individuals who came up with an arbitrary formula, let alone the Finance Commission of the country, will look at the results of their own formula. If it looks wrong, it’s probably wrong. The only thing to do at that point is to try and come up with a better version. As some Opposition leaders have suggested, new parameters for disbursal of funds in the COVID-19 context could have been considered by the Centre when disbursing funds.

The parameter ‘AE’ above, which is an indication of how much the past disasters caused the states to draw from the SDRF is a wrong measure on many counts in the first place. No state thinks of the SDRF withdrawal as the only measure of the extent of any calamity. And if the state had a poor allocation in the first place, it’s not as if the state can overdraw to change it next time, which is what the formula above expects. Then, to arrive at population and area metrics, the state of Maharashtra is arbitrarily chosen as a reference. This works in Maharashtra’s favour; it has the highest allocation therefore. It however negatively impacts states that are unlike Maharashtra. The SDRMF as a common pool exists so that the country can come to the assistance of any state in times of disaster. The COVID-19 crisis is a global pandemic and thus a state targeted fund isn’t serving that purpose well. But even then, it’s odd how arbitrary and maddeningly frustrating India’s resource allocation rationale is.

States already haven’t received GST dues from the Centre to the tune of some Rs 40,000 crore. The states of Punjab, West Bengal and Kerala have already been vociferous about this; they have even threatened to take the central government to court. And then there’s the revenue deficit grant that the central government arbitrarily slashed. The 15th Finance Commission recommended revenue deficit grants of Rs 74,340 crore for all states combined. The Budget allocated only Rs 30,000 crore towards this. That’s another Rs 44,340 crore that should have gone to the states but hasn’t.

State governments are responsible for law enforcement, health, sanitation and PDS. These are exactly the areas where governance is needed as a response to COVID-19. The Centre’s reluctance to acknowledge that its powers are limited and the pandemic requires a robust state level response has possibly hampered its acquiescence in terms of funds transfer. It also comes as no surprise, sadly. The central government, if the Prime Minister’s flagship programs are anything to go by, has sought a greater role in the everyday lives of people.

Politicians see this as a way to both accrue power and possibly as their responsibility, given they run on these promises during elections.

India’s response to this pandemic is going to add another chapter in the already fraught Centre-State relations.

Nilakantan R.S. works as a data scientist for a tech start-up and looks at politics from that vantage point.

* The 15th Finance Commission allows the State Disaster Relief Fund (SDRF) and the State Disaster Relief Mitigation Fund (SDRMF) to be merged into a consolidated fund from which states can draw from. For consistency, we refer to it as the SDRMF here.

** Data for confirmed COVID-19 cases per state as reported by the Ministry of Health and Family Welfare on April 4, 2020.

*** The formula works thus: Z = Y + W. Where, Z is the base allocation for each state

Y = W * DRI

W = AE + A + P

So essentially, we have Z = W*DRI + W. Which is W(DRI +1).

Remember, DRI: Disaster Risk Index, AE: Previous Years’ Expenditure from SDRF (70% weightage), A: Area (15% weightage) and P: Population (15% weightage)

Economic Slump: India’s Rickety Bridge Over Troubled Waters

Sustaining growth amidst a global economic slowdown would require tackling corruption.

Raghuram Rajan, the-then outgoing Governor of the Reserve Bank of India, in an exit interview he granted to Karan Thapar (‘To The Point’, YouTube, September 2, 2016), took satisfaction from the fact that India was “on a more sustainable growth path”.

The remark turned out to be premature. Less than two years later, starting the first quarter of FY 18/19, ominous signs of weaknesses started to emerge. GDP growth, which has been sliding continuously over six quarters, reached 4.5% per annum in the second quarter of FY 19/20. The slide may not be over yet.

If engineers inspecting a bridge find serious structural weaknesses, they can only conclude that the bridge is unsafe. But, their science cannot predict when the bridge will come down. Similarly, a detailed analysis of structural economic weaknesses cannot predict the timing of the next slump. Economists can at best be faulted for not being cognizant enough of the risks to the sustainability of growth.

The euphoria about India’s prospects following the economic reforms of 1991 is understandable. After all, growth had averaged just about 3.5% per annum in the pre-reform period. Moreover, the economy’s performance was more volatile with brief spurts in growth punctuated by painful crashes. The opening up of the economy through less state intervention not only ratcheted growth upwards to about 7% per annum on average, they came with far less volatility.

Also read: ‘Why Let a Good Crisis Go to Waste?’: What India Needs to Remember to Overcome its Economic Slump

According to the United Nations Development Programme (UNDP), some 271 million Indians were lifted out of poverty between 2005/06 and 2016/17. Reports issued by various large US multinational companies like Cisco, Citi and PwC held out the possibility that India would become the second-largest economy in the world after China and possibly an advanced country by 2050. The findings were reported by several major international and Indian newspapers.

Laudable as those achievements were, growth was not inclusive. While the top 1% of earners walked away with 22% of national income, the top 10% accounted for a whopping 56%. Had growth been inclusive, the resulting rise in incomes and opportunities would have been equitably shared by all income groups sharply reducing inequality over time. It is not surprising why attaining inclusive growth is far more difficult than boosting growth rates themselves.

Why India’s growth story is not sustainable

In a recent article (Why Let a Good Crisis Go to Waste? What India Needs to Remember to Overcome its Economic Slump, The Wire, November 20, 2019), I pointed out that corruption and poor governance have not only spawned rising income inequality but a host of other economic maladies as well. I was not trying to explain the downturn in terms of some recent developments like the collapse in consumption. Rather, I was referring to the structural weaknesses in the Indian economy as the genesis of India’s current economic predicament.

While it is possible for highly corrupt countries to register impressive rates of growth for a few years, widespread and entrenched corruption will thwart the sustainability of growth. Studies by the IMF and other international organisations point out a number of serious consequences of corruption.

First, corruption reduces the rate of growth. As a result, poverty in India could have been reduced at a faster pace were it not for corruption. The United Nations, based on data produced by the World Economic Forum, noted that the worldwide cost of corruption is at least 5% of global GDP.

Also read: The Short-Term and Long-Term Measures Needed to Reverse India’s Economic Slowdown

Second, as I noted earlier, weakly governed countries tend to invest far less in health and education than strongly-governed ones. Thus, when growth takes place, only the elites can take advantage of the expanded opportunities whereas the vast majority cannot qualify for well-paid jobs in the organised sector. They are left with little alternative but to eke out a living working in low-skill jobs in the informal sector. In short, countries with endemic corruption also tend to be highly unequal.

In fact, income inequality based on officially reported incomes collected through household income surveys significantly understate actual inequality. This is because the upper income groups, who are the main drivers of black money incomes and assets, understate their incomes in household surveys conducted by the government. If reported incomes were to include black money incomes generated from domestic and foreign assets, actual inequality would be worse than calculated inequality based on official income data.

Poverty in India could have been reduced at a faster pace were it not for corruption. Photo: rupixen/Unsplash

The greater actual inequality would have a larger destabilising effect than the measures available to economists would suggest. Assuming demonetisation left corruption intact, domestic black monies transferred abroad would return another day as inflows to drive up the stock market and other investments. Such round-tripping is often an elaborate scheme to launder dirty money.

Black money is mainly used to finance illegal and speculative transactions rather than boost productive investments in the official economy. In fact, while legitimate domestic investments have been on a declining trend, inflows of black money did nothing to help the economy. Regardless of how much black money was captured and surrendered to banks and how much could be traced to illegal activities, corruption cannot be curtailed without strengthening governance in all its aspects such as rule of law, effectiveness of regulatory oversight, quality and stability of politics, etc. To claim that demonetisation will curtail corruption is like putting on a winter jacket and expecting it to snow.

Third, wide-spread corruption leads to tax evasion by promoting a culture that tolerates the practice. The IMF finds that even among developed countries, strongly-governed ones collect about 4.5% of GDP more than relatively more corrupt ones. And that’s a lot of money the government could have used productively. The longer corruption rules, the more difficult it gets to dislodge it. In fact, as I have argued in my earlier article, corruption has restricted India’s fiscal space thereby significantly limiting the scope of a consumption-boosting targeted basic income.

Also read: India is Now in Classic Stagflation Territory

Fourth, corruption has reduced the effectiveness of government services through bribery, a reduction in compliance with government regulations, and the imposition of additional costs on investment projects. India’s “D” rated government effectiveness has led to a lack of public trust in officials and the quality of government services. This in turn promotes tax evasion because taxpayers do not feel that they are getting their money’s worth.

Fifth, researchers at the IMF found that child and infant mortality rates as well as the proportion of low-birthweight babies in countries with endemic corruption are much higher compared to countries where corruption is low. Moreover, school dropout rates are five times as high partly due to less effective government spending. The poor quality of public school education in India is consistent with these findings.

The deadweights of corruption, inequality, and environmental degradation would make it more difficult for India to deal with the crisis.

Finally, highly corrupt countries tend to be much more polluted than countries that are strongly governed. India is a perfect example of the nexus between rampant corruption and serious environmental degradation.

The tendency towards greater pollution is explained by the poor law and order, lack of environmental awareness, weak environmental regulations and their enforcement, bribery of regulatory officials, and a dearth of equipment and trained manpower to monitor compliance with regulations.

Hence, it is crucial to attain economic growth that is not only inclusive but environmentally sustainable as well. Inclusive policies by themselves cannot ensure that industries would comply with policies to protect the environment.

Sir Partha Dasgupta, Professor Emeritus at Cambridge University, finds that the fault lies in formulating economic policies which do not treat fresh water, clean air, and land as resources which could be depleted in the production process. Given that no country has an inexhaustible supply of these resources, there is a dire need for appropriate regulation, monitoring for compliance, and user fees to pay for clean-up and renewal. His work shows that environmental degradations will effectively derail economic growth if policies are not designed to take explicit account of these consequences.

Also read: GDP Data: Investment Growth at 19-Quarter Low Despite Modi Govt’s Stimulus Measures

This is not to suggest that growth strategies necessarily need to evolve from a low to a higher trajectory through reform before they can be inclusive as well as sustainable. Countries like Korea, Singapore, and Taiwan which made significantly larger investments in health and education were not only successful in ensuring more equitable outcomes and opportunities when growth occurred but have also avoided environmental degradation from limiting growth in the long run.

The primacy of volition

Even though structural issues are deeply embedded and take far longer to mitigate than counter-cyclical policies aimed at stimulating the economy, here too governments can do a lot more than pray.

Vito Tanzi, a fiscal expert and one-time director of the IMF’s fiscal affairs department, in an article on corruption around the world, opined that successful efforts against corruption typically begin with examples set by a country’s leadership. Top political leaders should not only provide the right example of honest living but should support stern legal action against corruption from any quarter regardless of political affiliations. If, on the other hand corrupt acts by friends, relatives, or political associates are condoned, then it would not be realistic to expect that public officials or indeed the country at large will behave honestly.

Also read: India’s Telecom Industry Is Being Cracked Like a Nut, but What Should the Centre Do?

The first step on the road to redemption is therefore the hardest one—leaders should set the right example, help support the appropriate laws, and implement a distinct plan for tackling corruption in all its manifestations. In short, the anti-corruption agenda must be strongly underwritten by the country’s leadership and the state governments as well. India needs to reduce corruption on a credible and sustained basis in order to better cushion the impact of difficult global economic conditions.

Global economic headwinds

In October, the IMF cut its forecast for this year’s global growth to 3.0% from 3.9% in January. Strong headwinds facing major economies such as geopolitical instability, business uncertainties, tariffs, and trade tensions, were responsible for the more somber outlook. The US Federal Reserve Bank began to cut its overnight lending rate to banks in July this year. The lending rate was lowered in three steps to a target range of 1.5 to 1.75% in October.

With the European Central Bank’s policy rate already in negative territory, the Federal Reserve’s rate cuts were accompanied by a significant decline in long-term bond yields. Stock markets are surging because of falling long-term interest rates and higher bond prices, not in spite of them.

Also read: The Dangers of Dismantling India’s Public Sector

The reason is investors have nowhere to place their funds to make a decent return other than in stock markets and other riskier investments, thereby driving their growth. So, there is no contradiction between weakening economies on the one hand and surging stock markets on the other.

While the easy money of central banks is meant to prop up slackening economic growth, the downside is that low interest rates are encouraging households to incur more debt and firms to take on greater financial risks. The corporate sector in India is carrying a heavy debt load and some may default on their loan repayments and fold, while others may require a rollover of debt or some sort of corporate debt restructuring.

Conclusion

We can expect the world economy to enter a protracted period of low growth, low demand, and low-inflation, its driving gear stuck in neutral. While well-heeled investors and pension funds around the world have earned handsome returns in the soaring stock markets and other riskier assets, these are dark waters.

The deadweights of corruption, inequality, and environmental degradation would make it more difficult for India to deal with the crisis and impose a heavy cost in terms of lost output, income, and jobs, along with an increasing risk of economic and political instability. These structural weaknesses need to be addressed on an urgent basis.

Dev Kar is Chief Economist Emeritus at Global Financial Integrity and a former Senior Economist at the International Monetary Fund. His book, India: Still A Shackled Giant, was released by Penguin Random House India in October 2019.

The Short-Term and Long-Term Measures Needed to Reverse India’s Economic Slowdown

The Narendra Modi government must rationally initiate these actions for reversing the slowdown instead of going after red herrings.

It is one thing to recognise that the Indian economy is slowing down, as the finance minister has done. It is another to know what needs to be done in the next few weeks, months and year to help reverse the slump.

In the government’s eyes, most challenges often appear binary. The problem is that their solutions fall in different shades of grey. In this case, it will require some unwinding of meaningless and self-defeating policies and a few positive interventions which will create a virtuous cycle of jobs, wages, investment and consumption.

In addition to this, the government will also have to initiate sensible policies which will spur growth and development when the economy eventually shows an uptick.

What is the big problem facing the Centre? It is the lack of employment and thereby lack of earning power of a large number of people that is the looming problem. This reality affects 60% to 70% of people, particularly in the rural areas which gets hit when the agriculture collapses and the network of the informal economy vanishes.

It is also a question of narratives. Economists with left leanings believe that the solution is more rural spending – more MNREGA, more food subsidies and more overall government intervention despite the fact that they are sub-optimal in delivery and that the Centre’s fiscal space is limited.

Also read: India is Now in Classic Stagflation Territory

If the government resorts to borrowing, it creates macro-economic instability apart from crowding out investment to private sector. Exhorting the government to put money in the pockets of India’s consumers, while understandable, may not be the best recipe because of pipeline losses, wrong nudges and suboptimal outcomes.

Contrary to this, more mainstream economists are batting for a reduction of tax rates, reduction in bank borrowing rates, RBI rate cuts and so on – as if all these transmit to higher investment. It is clear now that corporations sitting with money are not investing because the existing capacity utilisation is only 80% and they do not find any logic for further investment.

Both groups of economists cannot see beyond their blinkers. Intelligent taxation does not slow growth, judicious regulation does not stifle entrepreneurship and minimum wages do not destroy jobs. The Brooking Institute, and the Congressional Research Services, do not find any correlation between marginal tax rate and GDP growth and it is equally applicable to job growth, investors growth and productivity growth.

David Card and Alan Krueger’s landmark 1992 study has also shown that increase in the minimum wage can increase employment. Thus, it is time to unwind orthodoxy and try a heterodox approach.

Things to be done in short term

If in the short term, the country is looking for a centre of gravity for addressing the slowdown, a good starting point would be urban affordable housing, social housing and infrastructure. House building activity provides employment in numbers and its transmission effect to small towns and villages is both quick and good. If this perks up, there will be an increase in the demand for steel and cement and this will start a virtuous cycle.

The Centre has already initiated some action on affordable housing. The challenge is scaling it up; co-opting states and municipalities and having them use state resources for social housing. The government can give tax breaks and smoothen investment in this sector. Infrastructural development in the PPP framework gives positive spin offs too.

The banking sector, which is not lending for a variety of reasons, can be pushed to give loans to this sector, if necessary with higher collateral insistence.

Secondly, infrastructure investment should be stepped up, particularly in those sub-sectors which can create jobs. Roads, water-shed development, logistics chains such as warehouses, cold storage, grading and sorting facilities will not only give succour to agriculture and rural sector but also mitigate rural stress. Revitalisation of PPPs with appropriate and enforceable risk allocation will be helpful here. However, resources need to be allocated carefully to avoid investment on vanity projects such as rebuilding a new parliament, secretariat, statues and projects for earning political brownie points.

Also read: GDP Data: Investment Growth at 19-Quarter Low Despite Modi Govt’s Stimulus Measures

Thirdly, India has a comparative advantage in abundant supply of labour. The country will have to switch to large scale labour intensive industries and should specialise in their production and exports. Textiles, apparels, leather, handlooms and handicrafts should be focused for jumpstart the exports. This will bring down the trade deficit too. These sectors should be given cluster support, technology support and tax breaks for five years.

Lastly, government investment is important in the production side of the economy. Investment by the government becomes difficult when too many schemes and too much of subsidy transfer is taking place. The Centre must rework all the subsidy schemes and cut down its expenditure.

This can be helped through the stake sales in PSUs and monetisation of their land.

Medium and long-term interventions

Investment in the medium-term can be sought to be augmented by giving a sharp impetus to small scale manufacturing. People who are seeking to leave low productivity agriculture – those who are unemployed or under-employed – should be given technical training and be encouraged to set up businesses. Large industries can access bond markets but SMEs require banking support for sure. Even though higher collaterals are required, if should be insisted upon but funds should flow rather than being subordinated to the loans to large industries.

The time has come for reforms in land and labour. Labour reform is required for enabling large scale employment, doing away with mandated responsibility for paying workers even if the unit is not working. Emergency-era incorporations of Part V of ID Act must be taken care of now. Similarly, a richer variety of contracts with benefits of social security for workers is required for longer employment. Cleaner titles of land, simultaneous land transfer along with registration, technology based mapping and quicker land subdivision are required for enabling long-term lease of land and ease doing business in agriculture & construction.

On the credit front, many say that the five-year period between 2013 and 2018 was the failed clean-up stage for the banking sector. A reasonable inference is that the time is now ripe to bring down the government’s stake below 50% in state-run lenders in order to distance the Centre from banking.

Thirdly, subsidies for energy, water and fertilisers has distorted production. Progressively there subsidies are to be withdrawn to have climate-sensitive agriculture and free crop choice. In any case these subsidies have given largely to bigger farmers. Instead of these subsidies, a DBT transfer to the farmers will take away the likely opposition to the withdrawal of these benefits.

Also read: As GDP Growth Slips, Opposition, BJP Allies Attack Govt Over Slowdown

Fourthly, skilling in India is a huge problem. While millions wait for jobs, industries have huge gaps in manpower as the skill sets are not available. All the industries should be mandated to take in large numbers of apprentices, even if means the government pays part of the internship payment. This will mitigate problems of skilling. The government has initiated a huge skill development programme but its results have not solved the underlying problem. Ramping up apprenticeship for many may hold the answer to this intractable problem.

Lastly, with the Finance Commission’s award being round the corner, it is an opportune moment to insist on conditionalities to be complied with by the states as a condition precedent to devolution.

The Narendra Modi government, which has shown resoluteness in so many instances, can be expected rationally to initiate these actions for reversing the slowdown – if only it recognises it rather than going after red herrings.

Satya Mohanty is a former secretary to Govt of India and is currently Adjunct Professor of Economics in JMI, New Delhi.

Cabinet Extends Term of 15th Finance Commission

The term of the commission was originally set to end in October 2019, but was extended by one month to November 30.

New Delhi: The Union cabinet on Wednesday extended the term of 15th Finance Commission, which is to decide on division of tax and other resources between the Centre and the states, by one year to October 30, 2020.

“The cabinet approved the 15th Finance Commission to submit first report for the first fiscal year viz. 2020-21 and to extend the tenure of 15th Finance Commission to provide for the presentation of the final report covering FYs 2021-22 to 2025-26 by October 30, 2020,” according to an official statement said.

The term of the commission was originally set to end in October 2019, but was extended by one month to November 30.

The extension of the term will enable the commission to examine various comparable estimates for financial projections in view of reforms and the new realities to finalise its recommendations for the period 2020-2026, it said.

Also Read: India’s Income Tax Rates May Be Cut, But What Reforms Should Accompany Them?

“The commission, on account of the restrictions imposed by the model code of conduct, completed its visit to states only recently. This has had a bearing on the detailed assessments of states requirements,” the statement said.

The terms of reference for the commission are wide-ranging in nature, as per the statement. “Comprehensively examining their implications and aligning them to the requirements of the states and the central government will require additional time,” it said.

The proposed increase in coverage of the period for which the commission’s recommendations are applicable, will help medium-term resource planning for the state governments and the central government.

“Making a five-year coverage available for the commission beyond 1st April 2021, will help both state and central governments design schemes with medium- to long-term financial perspective and provide adequate time for mid-course evaluation and correction,” it further said.

It is anticipated that the impact of the economic reforms initiated in the current FY would be manifested in the data by the end of First Quarter 2020-21, it added.

A Challenge to the 15th Finance Commission’s Credibility

The Additional Terms of Reference were issued at the fag end, when the commission had presumably completed all required processes.

On July 29, the president of India issued an order extending the date of submission of the report of the 15th Finance Commission (FC) to November 30, 2019. The same order also includes one additional term of reference (AToR). The commission is required “to examine whether a separate mechanism for funding of defence and internal security ought to be set up and if so, how such a mechanism could be operationalised”.

Incidentally, consultative process and close examination of finances of both the levels of government provide the foundation of a finance commission’s recommendations. This is what has contributed to its high credibility and its image as an independent and non-partisan institution. The AToR is issued at the fag end when the commission has presumably completed all the above processes.

The ToR of an FC is constitutionally defined under Article 280: Distribution of the net proceeds of the sharable taxes between the union and the states and allocation among the states; the principles that should govern grants in aid of revenues of the states out of the Consolidated Fund of India and later the 73rd and 74the amendment of the Constitution added the measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and municipalities on the basis of the recommendations of state FCs. However, under 280 (d) the President may refer any other matter in the interests of sound finance.

Beginning from the first FC, additional issues were in fact referred to successive FCs. These reflected one or the other concerns relating to sound budget and fiscal management. The AToR which relates to protecting defence and internal security expenditures of the Union government does not fit in the framework of the constitutional provision, Article 280 (d).

Similarly, defence is in the Union list and therefore the responsibility of the Union government while internal security is largely the states’. Even when states requisition para military forces, they bear the expenses. It is not, therefore, an issue that should legitimately come under the domain of the FC.

Also read: The 15th Finance Commission May Split Open Demographic Fault Lines Between South and North India

In any case, the original ToR itself incorporates a consideration to have regards to, “The demand on the resources of the central government particularly on account of defence, internal security, infrastructure, railways, climate change, commitments towards administration of UTs without legislature and other committed expenditure and liabilities.”

There could be two reasons why this AToR is added at this stage. One, the defence expenditure declined from 2% of GDP in 2014-15 to 1.48% in 2018-19 and even lower at 1.45 % in 2019 -20 budget. Similarly, defence expenditure as a percentage of the government’s expenditure declined from 14.3% in 14-15 to 11% in 20i9-20. The other is that with the slowdown of the economy, it would be a challenge to even ensure this low level of allocation provided in the budget for 2019-20 while maintaining the fiscal deficit at 3.3%. Hence, the attempt to ring-fence the defence expenditure.

Having been referred to, what could the 15th FC do?

As noted earlier, the FC is already required to, under the original terms of reference, take into consideration the defence and internal security needs. While assessing the requirements of the Union government, the 15th FC should explicitly take into consideration the fact of the declining defence expenditure as a percentage of its total expenditure and make appropriate provisions in its expenditure projection.

The 15th FC could also recommend that the Union government reallocate expenditures wherever possible and eliminate wasteful expenditure. Further, it could suggest that the government mobilise more resources from sources such as the following: first, it should take measures to raise the tax-GDP ratio which has slumped to 11.7% in 2019-20 (Budget Estimates) as compared to 11.9% in the Revised Estimates to augment its resources to meet its expenditure requirements.

Second, it could minimise undisputed tax arrears which stood at around nine lakh crore at the end of 2017-18 and non-tax arrears of about 2 lakh crore in the same year. Similarly, the government could rationalise the tax incentives given to the corporate and non-corporate sectors – for the corporate sector alone, it was estimated at 1.39 lakh crore in 2018-19, which perhaps would decline following the recent policy decision if the corporate sector avails the lower rate of corporation tax, by giving up the incentives and exemptions they have been enjoying. Third, the Union government could monetise the huge chunk of government land under the ministry of defence, the railways etc., which the thirteenth commission, indeed, had recommended.

Also read: On Finance Commission Allocations, Modi Is So Far off the Mark, It Isn’t Even Funny

What should the 15th FC not be doing?

Over the years, the FC has established itself as a non-partisan institution of fairness and neutrality in which states repose a great deal of trust. It should not do anything that has an adverse impact on the divisible pool. In any case, the divisible pool is under significant stress. First, the 15th FC may not be able to increase states’ share beyond 42% that the 14th FC recommended.

Second, with a slowdown of the economy, the divisible pool would be adversely impacted. Third, with seven state taxes being subsumed in the GST, the states’ ability to mobilise resources from their own sources has been constrained. Fourth, the GST has yet to emerge as a buoyant tax.

On the contrary, CAG (Report no. 11 of 2019) noted that its yields declined by Rs one lakh crore in the revised budget of 2018-19 as compared to the original budget for 2018-19. It might further decline until the slowdown of the economy is reversed. States’ GST revenue with 14 % growth would be protected till 2022-13 but not for the entire award period of the 15th FC.

Fifth, cess and surcharges that are outside the divisible pool have increasingly become important instruments of revenue mobilisation. Just to illustrate, while the total transfer to states and UTs were Rs 4.1 lakh crore in 2017-18, revenue mobilisation by the central government through cess and surcharge stood at 3 lakh crore or 15.7 % of Centre’s gross tax revenue.

This went up to 5.12 lakh crore in 2019-20 (BE) accounting for 21.03% of the Centre’s gross revenue as against the total transfer to states and UTs to only 5.2 lakh crore in 2019-20 (BE). Last but not the least, even after rationalisation and restructuring of the centrally sponsored schemes, there remain 28 core schemes in which the general category states are required to contribute in 40% for their costs and three optional schemes requiring states to contribute 50%. Increasing states’ contribution to Core and optional schemes has clearly led to reducing states’ fiscal space and autonomy.

Also read: Debate: The Fifteenth Finance Commission is Vital for Economic Equality Within the Indian Union

For all these reasons, the 15th FC should deal with the AToR in a way that would have no adverse impact on the divisible pool which is already under great stress.

Atul Sarma is the chairman of the OKD Institute for Social Change and Development and was a member of the 13th Finance Commission.