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?
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
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