On the Edge with the Cen­tre

BUD­GET 2017 Is it a raw deal for states at a time they may need fis­cal sup­port the most?

The Economic Times - - The Edit Page - Aurodeep Nandi

In­dia’s fis­cal deficit is not 3.2% of GDP, as fi­nance min­is­ter Arun Jait­ley am­bi­tiously set out in his Bud­get speech. It is, in­stead, more than dou­ble the amount. That is be­cause 3.2% rep­re­sents only the dif­fer­ence be­tween the cen­tral­go­v­ern­ment’sex­pen­di­ture­and its own rev­enue. The big­ger spenders in In­dia are the state gov­ern­ments.

Cen­tral spend­ing ac­counts for less than 50% of the to­tal ex­pen­di­ture, and around 60% of the to­tal debt that GoI holds on its books. And, quite nat­u­rally, it is the con­sol­i­dated fis­cal jig­saw that global credit-rat­ing agen­cies piece to­gether while ar­riv­ing at In­dia’s sov­er­eign credit rat­ing — which is barely a notch above junk.

In­dia’s com­bined debt is close to 70% of GDP, one of the high­est among the emerg­ing mar­kets, only topped by re­ces­sion-struck Brazil. So, while the re­cent Eco­nomic Sur­vey car­ries a spir­ited in­fo­graphic ar­gu­ment that there is an in­ter­na­tional con­spir­acy afoot to keep In­dia’s credit rat­ing low, the fact re­mains that for In­dia to cred­i­bly im­prove its rank­ing, it has to work on fis­cal dis­ci­pline of both Cen­tre and states.

Both have had a sto­ried past. Once upon a time, post-In­de­pen­dence, an as­sertive Cen­tre was con­sid­ered nec­es­sary for na­tional in­te­gra­tion. Hav­ing a sin­gle party gov­ern­ing most states in 1950-60s In­dia also made it po­lit­i­cally sim­pler. Over years, sta- tes have be­come ex­po­nen­tially more fis­cally as­sertive and in­de­pen­dent. It is a wel­come move given that the Con­sti­tu­tion en­trusts them with the de­liv­ery of a size­able bulk of key pub­lic ser­vices.

States have his­tor­i­cally been more fis­cally pru­dent than the Cen­tre, with most of them suc­cess­fully ad­her­ing to the 3% fis­cal deficit ceil­ing that they have been man­dated to fol­low. This in­cludes 2009-10, when the Cen­tre’s deficit was as high as 6.5% (mak­ing the over­all fis­cal deficit of In­dia a mind-bog­gling 10.5% of GDP).

But since then, GoI has rather em­phat­i­cally pulled up its socks. Cen­tral fis­cal deficit has been pro­gres­sively cut from above-6% to the 4-5% range, and now sub­se­quently closer to 3%.

Son Be­comes Prodi­gal Again

Till 2013, states were do­ing pretty much the same. Their fis­cal deficit im­proved from 3% to 2% of GDP. How­ever, for the last cou­ple of years, the sit­u­a­tion has started de­te­ri­o­rat­ing. States find them­selves vi­o­lat­ing their 3% tar­get. So much so that much of the progress that the Cen­tre has made in con­trol­ling fis­cal deficit has been un­done by the state gov­ern­ments in their slip­page. As a re­sult, over the past cou­ple of years, state bor­row­ing has sharply es­ca­lated.

There are a num­ber of rea­sons for the fis­cal slip­page of states. For one, in­creased de­vo­lu­tion of funds from the Cen­tre has been ac­com­pa­nied by a dra­matic ra­tio­nal­i­sa­tion of spend­ing on cen­trally spon­sored so­cial sec­tor schemes and grants. The gen­eral eco­nomic slow­down has also con­trib­uted to weak rev­enues, a par­a­digm firmly set to con­tinue in the com­ing year.

Add to this, the pres­sures of im­ple­ment­ing the 7th Pay Com­mis­sion. Fi­nally, steep in­ter­est pay­ments on the Cen­tre’s Ujwal Dis­com As­sur­ance Yo­jana (UDAY) scheme — aimed at fi­nan­cially turn­ing around debt-rid­den state-owned power dis­tri­bu­tion com­pa­nies — have frus­trated fis­cal dis­ci­pline for states.

All of this at a time when the goods and ser­vices tax (GST) is on the verge of pas­sage, which will ex­tin­guish some of the ma­jor sources of es­o­teric fund­ing for the states. The Bud­get was con­spic­u­ous in its ab­sence of al­lo­cat­ing any sep­a­rate funds for com­pen­sa­tion to states. Which some opine could very well need to be as high as 0.3% of GDP.

At the Cen­tre of Things

On first sight, it looks like GoI has ac­knowl­edged some of these pres­sures in its Bud­get, and in­creased trans­fers to states (in­clud­ing de­vo­lu­tion of taxes) in the com­ing year by 9% from this year’s lev­els. How­ever, that isn’t nec­es­sar­ily the best way to read the Bud­get. Af­ter all, ex­penses and rev­enues aren’t the only vari­ables to grow be­tween years. The econ­omy also grows si­mul­ta­ne­ously, af­fect­ing all parts of the Bud­get. Which is why most of the fis­cal num- bers are pre­sented as a per­cent­age of GDP. It helps un­der­stand the true mag­ni­tude of the fis­cal data.

And therein lies a slightly more wor­ry­ing trend. As a share of GDP, the Cen­tre’s pay cheque to states was 6.8% in 2015-16. That was re­duced to 6.6% this year. And the Bud­get says that next year, it is go­ing to fur­ther re­duce to 6.4%. Which means that states are left to fend for their fis­cal stresses for them­selves — ei­ther by fight­ing the odds to re­duce deficits, or hav­ing to bor­row even more from the mar­ket.

So, on the one hand, Arun Jait­ley has done the fis­cally re­spon­si­ble job of keep­ing fis­cal deficit to a low of 3.2%. On the other hand, it comes on the back of economis­ing the size of the en­ve­lope that gets passed on to states. At a time when they prob­a­bly need fis­cal sup­port the most.

So, for all those look­ing at the con­sol­i­dated fis­cal sit­u­a­tion of the coun­try — in­clud­ing the global credit-rat­ing agen­cies that the gov­ern­ment has lately been so keen to im­press — the frowns refuse to re­main bud­geted.

The writer is a se­nior eco­nomic ad­viser at a for­eign mis­sion in New Delhi

Do we need to change this hub-and-spoke model?

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