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Governance

Surge pricing in railways is Suresh Prabhu's deliberate self-goal

Union railways minister Suresh Prabhu’s latest move of “surge pricing fare system” is a gambit to reduce finance minister Arun Jaitley’s pain, who looks all set to soon adopt country’s messy public transport behemoth. If everything goes by the plan, the 93-year old Rail Budget would cease to exist from the next financial year i.e. FY […]Read More »

Why Vajpayee stands taller than Rao, Manmohan and Modi put together

In India, privatising a public sector company is perhaps a bigger challenge than contesting an electoral battle or even conducting a nuclear test. Don’t see it as an incongruous claim. This may well be a credible reality if one looks at the 25-year-long history of India’s economic liberalisation. In two-and-a-half decades of economic reforms, despite […]Read More »

Modi's war on black money is a let-down, amnesty schemes cheat honest taxpayers

If one pays his or her taxes honestly and does not expect any favours from the government, he or she has every right to show angst over this never-ending business of amnesties to tax swindlers. Prime Minister Narendra Modi repudiated history when he, during his last Mann Ki Baat, reminded people of the September 30 […]Read More »

Special Category for Andhra will remain elusive

In February 2016, Prime Minister Narendra Modi had assured the Andhra Pradesh Chief Minister Chandrababu Naidu that he would consider conferring the special category status to his state. Apart from this privilege, Naidu has been demanding a special package for the residuary state of Andhra Pradesh after it was carved out from the erstwhile composite […]Read More »

India needs a water-sensitive food trade policy

If one lists the nations most suited to produce wheat, sugarcane, cotton and soybean, China and Egypt will definitely stand atop on historical, geographical and climatic counts. World’s largest river Nile flows in Egypt which every year collects fertile soil from different countries in Africa and deposits it in its delta. On the other side […]Read More »

Modi sarkar and telcos have both hung up on the consumers

Do you get full signal on your mobile? Is your data speed fast enough? Have mobile companies started compensating you for call drops? If your answers are a resounding “no” (naturally, they would!) then, more than the government, we ourselves are responsible. We Indians, afflicted with a strange kind of amnesia, tend to forget the […]Read More »

Modi's foreign trips can wait. Indian trade needs emergency landing

Howsoever spectacular Prime Minister Narendra Modi’s diplomatic campaign might have been, the fact remains the void in the trade diplomacy has grown faster than ever. If the government’s own Economic Survey is to be believed, India’s foreign trade has gained momentum over the last decade with a flurry of free and preferential trade agreements signed […]Read More »

Modi sarkar should bet on services for dream growth

If one observes the samurais of growth driving the GDP rate above seven per cent, one wouldn’t find them in the swanky corporate offices of Mumbai and Delhi, but in the markets close to one’s home. These growth warriors make our lives easier by running eateries, repairing shops and providing dozens of similar services and […]Read More »

Don’t make India a circus of cartels and monopolies

Facebook’s Free Basics trial was so legendary that one Ganesh could double the yield from his fields with the knowledge FB-patented internet facilitated. While, advertisements are notorious for making lofty claims, this one goes beyond limit. Considering the state of agriculture in India, this can’t even be an exception let alone a norm. As it […]Read More »

Let’s fix the system instead of opting out

Allahabad High Court passed an interesting order last month, directing the Chief Secretary of Uttar Pradesh to ensure that from the academic year beginning 2016, children of all officials serving with the government, including judiciary, local bodies and representatives of people, must send their children to study only in government primary schools, failing which the […]Read More »

That is retrograde, Mr Jaitley

An important step in clearing our institutional financial system of the cobwebs it has gathered over the years has now been reversed, with Mr. Arun Jaitley announcing deferment of his plan to set up an independent public debt management authority, which he had promised in the budget presented earlier this year. Till now, Reserve Bank […]Read More »

Coalgate Revisited

  The auction of 33 of the 204 coal mines, whose allocations were cancelled by the Sup¬re¬me Court, has just been completed. The auction has brought the government a ‘windfall gain’ of Rs 2.07 lakh crore for 19 operational blocks and 13 about-to-open blocks which were put under the hammer, against Rs 1.86 lakh crore […]Read More »

Will Federalism at Work Let Populism Thrive ?

The just released recommendations of the Fourteenth Finance Commission’s will have far- reaching consequences for the states of the Indian Union, with 42 percent of the central divisible pool of resources now going to them, as compared to the existing 32 percent provided by the Thirteenth Finance Commission. In terms of resources now available to […]Read More »

Will Federalism at Work Let Populism Thrive ?

finance-role

The just released recommendations of the Fourteenth Finance Commission’s will have far-
reaching consequences for the states of the Indian Union, with 42 percent of the central divisible pool of resources now going to them, as compared to the existing 32 percent provided by the Thirteenth Finance Commission. In terms of resources now available to the states, it is indeed a quantum jump from the recommendations of all previous Finance Commissions which increased the states’ share only in low incremental steps.

Divisible pool initially used to comprise only income tax and part of central excise duties. Successive commissions increased the states’ share of these taxes. The Eleventh Finance Commission (2000-05) expanded the divisible pool substantially by including in it the net proceeds from all taxes covered under article 270 (income tax, corporation tax, central excise duty, customs duty, service tax and wealth tax) and making 29.5% of this pool sharable with the states. The next two commissions increased this share to 30.5% and 32% respectively. Cess and surcharges are excluded from the divisible pool which are entirely appropriated by the Centre; this remains a sore point with all states. Apart from devolution of taxes, Finance Commissions also recommend grants-in-aid of revenues of states under article 275.

The taxes are divided among the states on the principles of equity and efficiency, effectively transferring resources from the rich to the poor states on the basis of a formula that factors in population and area of a state, inter-state disparities in income and their fiscal and financial fiscal performance. From the sixth commission onwards, Governments have restricted the Finance Commissions to recommend only non-plan grants, plan part being made the prerogative of the now defunct Planning Commission. Plan transfers in most part depended on the discretion of the Central government; only a part was formula based that progressively went on shrinking with the proliferation of centrally sponsored schemes. These discretionary transfers have now been reduced after the replacement of the Planning Commission by Niti Aayog, an expert body without any power of resource allocation.

But the landscape of federal financial relations between Union and states have really started
changing since the recommendations of the Twelfth Finance Commission; before that, the Finance Commission recommendations were by and large accounting recommendations, a little more here, a little less there. These failed to address the perennial financial problems of the states which had revenue resources that fell far short of their revenue expenditure, let alone capital investment requirements, for which they had to borrow heavily. This led to swelling debt burden of each state and the nominal debt reliefs given by the successive Finance Commissions could hardly mitigate the crushing burden of their debt. Unable to manage this on the strength of their own resources, the states had to borrow from the centre just to be able to repay their debt instalments and interest; many states couldn’t even manage that as servicing of their existing debt exceeded their fresh borrowings. The successive Central Pay Commissions, especially from the Fifth Pay Commission (1996-2006) onwards, increased the salaries of Central government employees forcing the states also to give matching rises to the salaries of their own employees without having matching resources, this compounded their financial problems even more. After the sixth Pay Commission recommendations (2006-16), the situations went absolutely beyond the control of most states and they started sinking in debt deeper and deeper.

Meanwhile the market rate of interest was going down, but Article 293 of the Constitution did not allow the states to borrow from the market without the Centre’s permission if they were indebted to the Centre, which they were. Centre continued to charge higher interest rates which further worsened their indebtedness, making them fall into the viscous debt trap one by one, heading for sure disaster. It was in these circumstances that the Twelfth Finance Commission was constituted. They diagnosed the problem correctly but departing from the incremental accounting approach of the previous Commissions, came up with an outstanding out-of-box solution, forcing the states to control their unproductive expenditure by enacting FRBMA (Fiscal Responsibility and Budget Management Act), which bound themselves to contain their fiscal deficits within 3 percent of state income (GDSP) and in return, freeing them from the obligations of borrowing from the Centre. They rewarded states that could generate surpluses in their revenue accounts by giving them a matching relief on their debt burden and more. As a result, most states, except a few indigent ones, could pull themselves out of their debt traps by generating revenue surpluses. These surpluses financed their capital expenditure, curtailing borrowing to that extent. Their debt burden thus reduced as a consequence and their finances improved. The Thirteenth Finance Commission further reinforced the states’ improved financial position and increased their share of divisible pool to 32 percent. Even West Bengal and Sikkim which had hitherto refused to enact the FRBMAs were now forced to enact these legislations so as to avail the benefits that could no longer be ignored for the sake of populism.

But the recommendations of the Fourteenth Finance Commission go far ahead – they have the potential to redefine and redraw the contours of federal finance in India by giving much more fiscal space to states to identify their own priorities and to spend thereon, instead of making them depend on an all-powerful centre to dole out resources through plan funds as per its own discretion, and in the process, jeopardising the process of growth and development of the country as a whole.

Centralised planning was a negation of the spirit of true federalism. Spirit of federalism is asserted when Centre and states are seen as equal partners in development, and not the former as a giver and latters as recipients of common resources, as it has been until now. National interest must be supreme in any arrangement of federal transfer of resources, but the aberration of the badly implemented centrally sponsored schemes, often designed with dubious logic, has so far hideously defeated this objective. The number of these schemes has now reduced from 347 during the ninth plan to only 66 now, but these are still far too many. Hopefully, Fourteenth Finance Commission’s far-reaching recommendations will now force the Centre to consider scrapping some of these anachronisms and give the states the authority to spend the taxpayers’ money more judiciously, according to the right priorities and careful targeting so as to eliminate wastes, leakages and corruption.

The recommendations will have the effect of increasing the net flow of funds to the states by extra Rs 2.21 lakh crore during 2015-16 alone – the biggest ever jump in the state’ share so far. During the award period of the Commission (2015-20), tax share to states will exceed Rs 44 lakh crore. In addition, 11 states with deficits in their revenue account will get grants amounting to Rs 1.95 lakh crore during the period. Local bodies stand to gain significantly, with Rs 2 lakh crore earmarked for Gram Panchayats and Rs 87000 crore for our almost dysfunctional municipalities – resources enough for transforming them, if used judiciously. The aggregate level of transfer of Central resources – plan and non-plan combined – is estimated go up only by about 2% over the award period, but most of it will now be based on formula rather than on discretion and not tied to plan schemes of questionable usefulness. The Commission’s methodology has been robust and estimates conservative, avoiding a high growth scenario in respect of taxes and GDP, which increases the credibility of their recommendations. By including forest cover as a new environmental factor and by giving weightage to inter-state migration since 1971 in population, it has taken into account the changing realities of the time.

For transfers outside the Finance Commission, it has recommended setting up of a new institutional mechanism ‘consistent with the overarching objective of strengthening cooperative federalism’, by limiting discretion, improving design and giving adequate flexibility to the States. By recommending to exclude the States from the operations of NSSF

which was forced upon them, it has given them more liberty to manage their debt. It has also urged the Centre to follow the true spirit of fiscal responsibility by dispensing the concept of ‘Effective Revenue Deficit’, ingeniously invented by it to circumvent the 3% limit on fiscal deficit. All these recommendations are likely to bring in transparency and accountability in the public finances of union as well as states, heralding a spirit of federalism this country has not seen so far.

There is of course a danger lurking which the Commission ought to have considered and pre-empted. The mistakes that the Congress governments at the Centre had made by resorting to unbridled populism at the cost of the nation’s growth are now much more likely to be repeated with the increased resources available to the states. They are already in evidence in Delhi where the newly elected government has announced sops that will cost the exchequer about Rs 1700 crore annually. They may be fulfilling their election promises, and Delhi, a Union Territory, may not be under Finance Commission’s jurisdiction, but such trends are irresponsible and dangerous. They are likely to be repeated by many states, especially those going to polls within a few months, like Bihar, West Bengal and UP. The potential of subverting economic gains for populist purposes assumes serious proportions when political parties enter into opportunistic alliances forsaking all semblance of principles with an astonishing brazenness and when looters masquerading as leaders are in positions to drive governance in states, our politico-economic arrangements needs serious introspection. These states will now find the increased resources as a welcome bonanza to spend on ever more populism, squandering resources through unconstrained sops and doles in an election or pre-election year. A forward looking Commission ought to have provided safeguards against these pitfalls.

* First Published in The Statesman on 3rd March 2015

Finance

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Modi government has got carried away by its make-believe growth data

  Economic growth isn’t achieved merely by change of governments, or by a series of electoral victories. Although governments keep making tall claims and paint rosy pictures in front of public, they themselves don’t let it get to their head as they know growth results only when a host of factors fire in tandem. However, […]Read More »

4 disastrous effects of demonetisation that Modi ignored

In spite of several inefficiencies, fortunately, India never witnessed a bank-run or monetary crisis parallel to the scale in Europe or America. However, the chaos and long queues that engulfed banks across India now perfectly mirror the plight the Greeks faced last year, albeit for different reasons. Demonetisation is a rudimentary monetary instrument of the […]Read More »

Modi's historic move against black money brings chaos now, gains later

While Prime Minister Narendra Modi’s unprecedented move to temporary demonetise Rs 500 and Rs 1,000 notes is expected to bring in a host of positives, it will also set off major administrative and logistical challenges at the outset, not to mention the plight of common people. The government and Reserve Bank of India (RBI) will […]Read More »

Diwali or not, India can't boycott Chinese goods

Last fortnight, close on the heels of the rise of firecracker nationalism against Chinese goods on social media, Reserve Bank of India (RBI) was busy making adjustments for yuan’s entry into India’s foreign exchange reserves. Not only RBI, most of the global central bankers too had to alter metrics of their forex reserves after yuan’s […]Read More »

Despite $10 billion in tax net, Modi sarkar's amnesty is a colossal failure

Despite the long history of failed tax amnesty schemes, the Narendra Modi government tried its luck with tax pardons, but to no avail. Howsoever pliable the statistics might be, the fact remains that declarations of Rs 65,250 crore under the black money disclosure scheme could attract just a moderate success for the NDA government. However, […]Read More »

Modi must walk the talk on GST

Even if one doesn’t buy everything that Prime Minister Narendra Modi claimed in his Parliament speech on Goods and Services Tax (GST), one should acknowledge that this is one of the most crucial structural indirect tax reforms in the last 25 years of liberalisation. This may not effectively clamp down on inspector raj, or turn […]Read More »

GST Bill an example of half-baked and vague reform

Contrary to the euphoria and costlier-cheaper headlines, the Constitution (122nd Amendment) Bill 2014 doesn’t spell out even the outline of the GST that India is expected to get in the future. The passing of the GST Bill is just the beginning of a tedious political and operational voyage that should ultimately result in the implementation […]Read More »

Raghuram Rajan, darling of Dalal Street, ‘devil’ for Delhi Durbar

  Sometimes words speak louder than actions. If nowhere, then at least in India. RBI chief Raghuram Rajan has fallen victim to his own candid words (read speeches) on issues of political import. However, his legacy doesn’t lie in his articulations as a blunt economist but as a top-class, innovative and professional central banker. And here […]Read More »

5.80 lakh crore in bad loans: Let's pray for India's bleeding banks

The Rs 13 lakh-crore pile of bad loans of India’s public sector banks now amounts to more than the GDP of countries like New Zealand, Kenya, Oman and Uruguay. A new IMF report states Indian banks are in a poor state compared to the notoriously messy banking of China.The financial results of major public sector […]Read More »

Modi government has actually worked hard to deliver on black money

  After facing severe criticism for its lofty electoral promises on bringing black money to India, Modi sarkar appears to have stuck its neck out on dealing with the issue. The Modi-led government, running past the two-year mark in office, has taken some calculated risks to go ahead on curbing black money. To promote transparency, the government […]Read More »

How India's wealthy are milking billions off subsidy

Do you think the politics of subsidy is only confined around lower and middle economic classes? If yes, then you would wonder how subsidies worth rupees one crore go into the pockets of the rich every year, and that too via merely seven products and services. The subsidy bill may notch up if one takes […]Read More »

India’s three-tiered economy needs bottoms-up approach

Has finance minister Arun Jaitley got it right? If one looks at the economy at hand, the answer would possibly be “Yes”. India is now a three-speed economy.  Double-digit growth is confined to a section that comprises sectors such as e-commerce, travel and stock markets and accounts for 30 per cent of the GDP. Another […]Read More »

India’s Trade Gloom

  Not many years have ended with gloomier prospects for Indian trade. The gloom is not just because of the contraction in exports for 12 months in a row. It is also because India’s role and participation in global trade is becoming increasingly insignificant. The insignificance was evident from the approach to the Nairobi Ministerial. […]Read More »

Budget 2016: Modernising rural economy must be Modi's mission

Last fortnight, when Prime Minister Narendra Modi mentioned crop insurance in his Maan ki Baat programme, people well aware of the state of agriculture justifiably grew anxious. This was not because government’s efforts do not inspire or encourage, but because in spite of three crop failures, Indian politicians are still handling farming with a mindset […]Read More »

Can India finally see a Modi Budget in 2016?

When existing steel companies are already reeling under distress owing to falling demand, why is the Union government going to establish new steel companies in the public sector? What is the need for forming new banks (monetary banks) to provide loans to small companies when several financial institutions of the government are already doing this? […]Read More »

How many more taxes do we need to pay?

Public memory is usually short but the memory of taxation is even shorter. Benchmark brent crude might have tested an unprecedented low of $37 per barrel, but domestic petrol and diesel prices are still ruling higher thanks to heavy taxes. If only the debate on goods and services tax (GST) revolved around explaining this dichotomy, […]Read More »

Is weak rupee still a national shame for PM?

Whether India draws an economic advantage from the ongoing global turbulence or not, a substantial political advantage can definitely be churned out at the moment. It is time for our leaders to rid themselves of their unfounded misconception on the exchange value of the domestic currency, that is, the rupee. In India, the BJP and […]Read More »

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