‘Finance Commission is not a one-day match’

15th Finance Panel Chairman N K SINGH concedes that incidences of cesses and surcharges have gone up between the 14th Finance Commission and the 15th Finance Commission recommendations. He tells Dilasha Seth and Indivjal Dhasmana that the 15th Finance Commission was cognizant of this.

15th Finance Commission (FC) Chairman N K SINGH concedes that incidences of cesses and surcharges have gone up between the 14th Finance Commission and the 15th FC recommendations. He tells Dilasha Seth and Indivjal Dhasmana that the 15th FC was cognizant of this. That is why it made robust recommendations on grants to partly compensate states. Edited excerpts: Why did you retain tax devolution to states at 41 per cent?

Actually, we have kept it at 42 per cent. One per cent is the adjustment for Jammu & Kashmir. We have done it for 28 states, not 29. If you see the evolution of the finance commission, the increase in devolution to states was always incremental. For the first time, a tectonic shift was made when the 14th Finance Commission raised it from 32 per cent to 42 per cent.

Looking at the needs of states and the Centre, adhering to

41 per cent was fair and appropriate. It balances the needs of states with the financial compulsion of the central government.

These days, the Centre is resorting to imposing cesses and surcharges, thereby side-stepping the recommendations of the finance commission.

One, the mandate of the finance commission is to concentrate on gross tax revenue. According to the constitutional provision, cesses and surcharges are not part of the divisible pool. Two, successive finance commissions have mentioned the concern about cesses and surcharges neutralising the devolution given through the finance commission formula. Three, considering that the broader issue of cesses and surcharges were outside our mandate, we were

cognizant of it.

You said the recommendations on grants were robust. But sector-specific and statespecific grants, totalling ~1.8 trillion, were not accepted by the Centre.

In sector-specific grants, the bulk is related to two specific sectors. One is health, the other agriculture. The one for health is ~32,000 crore; for agriculture, it is ~45,000 crore. On health, the grants given to the third tier will be designed to strengthen primary health centre and testing laboratories. In the restructuring of the centrally sponsored schemes (CSS) and central outlays, these recommendations will be subsumed. They will be considered in the context of rationalisation of framework of CSS and central outlays. On state-specific grants, they will be given serious consideration. The 15th Finance Commission is not a One-day match. It’s a five-year award.

There was confusion about the agriculture infrastructure cess being shared with states.

A strict reading of the Constitution implies that cesses and surcharges do not constitute a part of the divisible pool. If by other means, like executive orders, some part of the cess or surcharge is made available to states, it is up to the Centre to augment state revenue. As far as the formula on divisible pool is concerned, we have to go by the letter of the Constitution. The Constitution right now keeps cess and surcharge out.

Be it the issue of cesses and surcharge or goods and services tax (GST), Centre-state relations have been strained. What will you recommend towards strengthening cooperative federalism?

The central government has not diluted the nature and spirit of cooperative federalism. The gross revenue receipt for the five-year period comes to roughly ~154-155 trillion. When we go to gross tax receipts, it comes to ~134 trillion over a five-year period. Coming to the size of the divisible pool, it shrinks to ~101 trillion. So the 41 per cent devolution to states gives them about ~42 trillion as revenue. Add to that ~2.94 trillion on account of revenue deficit grants, the over ~4 trillion additional grants for disaster management, which appears to evenly balance the fiscal space of the Centre and states. The second issue is the misuse of Article 282 of the Constitution, under which many CSS and central outlays have been undertaken. Based on our recommendations, the finance minister mentioned in her 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 highlighted that the annual GST revenue shortfall is at ~4 trillion. By when do you estimate revenue to neutralise after the rate rationalisation exercise?

This is a hypothetical question. The decisions rest only with the constitutional body, which is the GST Council. However, we have made a number of suggestions on rationalisation of processes and procedures, and the bulk of them have been adopted in the finance minister’s Budget speech, including invoice matching, minimising invoice manipulation, and strengthening the technology platform to improve the quality of compliance. This has already had a virtuous multiplier effect.

While the Centre has accepted your recommendations on a glide path for states on fiscal deficit, it has capped its fiscal deficit at 4.5 per cent in the terminal year, 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 gross domestic product for the current fiscal year. I struggled very hard as chairman of the Fiscal Responsibility and Budget Management (FRBM) committee to come up with a more transparent system of accounting. For the first time, off-budget borrowings and further contingent liabilities and subterfuge methods to mask the actual incidents have been dealt with by the letter and spirit of the FRBM, namely the transparent accounting itself. On the glide path, it is only somewhat marginally elevated. There is a lot of merit in undertaking fiscal policies, which are counter-cyclical.

“FOR THE FIRST TIME, A TECTONIC SHIFT WAS MADE WHEN THE 14TH FINANCE COMMISSION RAISED IT (STATE DEVOLUTION) FROM 32% TO 42%”