Get the Money Ma­trix Right

It is time states woke up to their fis­cal re­spon­si­bil­ity and boosted their own sources of funds

The Economic Times - - The Edit Page - Vivek Singh & Karan Bhasin

Most dis­cus­sions on pub­lic fi­nance in In­dia have tended to fo­cus on cen­tral gov­ern­ment fi­nances. State gov­ern­ment fi­nances are now all the more rel­e­vant as the Fif­teenth Fi­nance Com­mis­sion is due to sub­mit its re­port.

It is im­por­tant to an­a­lyse ob­jec­tively the ex­pen­di­ture pro­file of states, in the con­text of the Four­teenth Fi­nance Com­mis­sion’s rec­om­men­da­tion to in­crease de­vo­lu­tion to the states from 32% of cen­tral taxes to 42%. The ar­gu­ment in favour was the need to give greater con­trol over de­vel­op­ment ex­pen­di­tures to state gov­ern­ments.

The rec­om­men­da­tion was ac­cepted by the Cen­tre as it in­creased the de­vo­lu­tion to states. For ex­am­ple, Bud­get 2019 set aside ₹8,09,133 crore to be shared with the states, up from ₹3,37,808 crore in 2014-15, an in­crease of 139% in six years. A lot of this in­crease was in un­tied funds that gave more free­dom to states in terms of their al­lo­ca­tion. There­fore, it would be op­por­tune now to dis­cuss the qual­ity of ex­pen­di­ture by state gov­ern­ments.

Ac­cord­ing to data with the Reserve Bank of In­dia, there are eight states — Andhra Pradesh, Haryana, Hi­machal Pradesh, Ker­ala, Ma­ha­rash­tra, Pun­jab, Ra­jasthan and Tamil Nadu — that are cur­rently in a rev­enue-deficit po­si­tion. Moreover, states such as Ch­hat­tis­garh, As­sam, Tripura and Ut­tarak­hand have also seen rev­enue deficits in the last few years. De­spite a sig­nif­i­cant in­crease in cen­tral al­lo­ca­tion, the fis­cal sit­u­a­tion of states is a cause for con­cern.

It is worth high­light­ing that this in­crease in rev­enue deficit came de­spite the states get­ting guar­an­teed tax rev­enue growth of 14% due to cen­tral gov­ern­ment’s com­pen­sa­tion for any loss in rev­enue due to the goods and ser­vices tax (GST).

A con­se­quence of the in­creased de­vo­lu­tion and GST com­pen­sa­tion has been that states haven’t fo­cused much on their own tax rev­enues. This is ob­serv­able when one looks at the rev­enue share of the cen­tral tax­pay­ers (as­sessees) in GST col­lec­tions, which was 44.9% for the cen­tral gov­ern­ment in 2018-19 and 45.3% in 2019-20 (April to De­cem­ber). In con­trast, that for the states has come down from 55.1% in 2018-19 to 54.7% in 2019-20. While this dip may be mar­ginal, it re­veals the lack of ad­e­quate fo­cus of states on im­prov­ing com­pli­ance on GST-re­lated mat­ters.

De­sign on De­vel­op­ment

Even as nom­i­nal growth has come down, the cen­tral gov­ern­ment, de­spite se­vere fis­cal con­straints, has lived up to its com­mit­ments; the wors­en­ing of state fi­nances is a se­ri­ous cause for con­cern. An anal­y­sis of RBI data on the states’ ex­pen­di­ture, State Fi­nances: A study of Bud­gets of 2019-20 (, shows that the share of de­vel­op­ment ex­pen­di­ture in to­tal ex­pen­di­ture grew only marginally, from 65.5% in 2014-15 to 65.9% in 2017-18.

An­other im­por­tant fact: so­cial sec­tor spend­ing by the states grew 16.5% dur­ing 2010-15, which sub­se­quently fell to 15.8% over the next five years. At a more gran­u­lar level, spend­ing on ed­u­ca­tion by the states es­pe­cially took a hit, with the growth rate fall­ing from 15.9% to 11.5% over the same pe­riod.

The com­po­si­tion and qual­ity of ex­pen­di­ture is ex­tremely im­por­tant from the point of view of our de­vel­op­men­tal ob­jec­tives. How­ever, the rev­enue bounty has been squan­dered away by states in the form of ex­pen­di­ture on farm-loan waivers and other such sub­si­dies. That is, states have used pub­lic re­sources that could have led to cre­ation of hu­man cap­i­tal (or in­fra­struc­ture) for the pur­pose of build­ing their po­lit­i­cal cap­i­tal.

Be­tween 2017 and 2019, no less than seven states an­nounced such waivers amount­ing to ₹1.66 lakh crore. Farm loan waivers came at the cost of upgra­da­tion of ru­ral in­fra­struc­ture and ex­ten­sion of re­search and de­vel­op­ment ser­vices in agri­cul­tural prac­tices. An­other prob­lem­atic area is of power dis­coms and of un­eco­nomic power sub­si­dies that have re­sulted in the power dis­tri­bu­tion sec­tor fac­ing a debt pile of over ₹4 lakh crore.

It is worth high­light­ing that the Four­teenth Fi­nance Com­mis­sion rec­om­mended a post-de­vo­lu­tion rev­enue deficit grant of ₹1,94,821crore spread over five years, up sig­nif­i­cantly from the ₹51,800 crore rec­om­mended by the Thir­teenth Fi­nance Com­mis­sion. De­spite this, states’ out­stand­ing li­a­bil­i­ties have bal­looned over the years — to ₹52,58,469 crore in 2019-20 from ₹27,03,760 crore in 2014-15.

A con­se­quence of the in­crease in bor­row­ings is that it in­creases the costs of bor­row­ing for the pub­lic sec­tor, which ab­sorbs a bulk of the do­mes­tic sav­ings that could other­wise be utilised by the pri­vate sec­tor for the pur­pose of fi­nanc­ing in­vest­ments.

Equal Re­spon­si­bil­ity

Fol­low­ing the re­cent amend­ments to the Fis­cal Re­spon­si­bil­ity and Bud­get Man­age­ment Act, the cen­tral gov­ern­ment’s deficit and debt pa­ram­e­ters have been ex­plic­itly de­fined while states have been al­lowed some flex­i­bil­ity. Nev­er­the­less, the onus of fis­cal dis­ci­pline does not lie solely on the Cen­tre, and there is a need for states to re­alise their fis­cal re­spon­si­bil­ity in or­der to bring bet­ter dis­ci­pline on the fis­cal front.

State gov­ern­ments are equal stake­hold­ers in In­dia’s growth story and, there­fore, they must work to­wards im­prov­ing so­cioe­co­nomic in­di­ca­tors by fo­cus­ing on eco­nomic growth. In­deed, one hopes that the Fif­teenth Fi­nance Com­mis­sion and its rec­om­men­da­tions would help ar­rive at a con­sen­sus on sev­eral of these is­sues.

Singh is ad­di­tional pri­vate sec­re­tary to the fi­nance min­is­ter, and Bhasin is an in­de­pen­dent econ­o­mist. Views are per­sonal

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