India's new fiscal architecture eliminates the form of neo-colonialism

  • Updated: Mar 10, 2015 22:01 IST

The budget is well behind us, and so are the comments of analysts and policy makers. There is a consensus that it has been a credible balancing act that has given a decisive momentum to the new economic upturn. What are the key policy options Union finance minister Arun Jaitley had? How have these choices been exercised?

First comes the classical choice of growth versus inflation. How much fiscal flexibility was acceptable? Does the quality of the public outlay in infrastructure — railways and highways — make a difference? The budget has adhered to the path of fiscal rectitude by meeting the fiscal deficit target of 4.1% this year. It has stretched out the terminal fiscal path to reach 3% with somewhat higher intermediate targets. The rating agencies prefer a closer adherence to the fiscal roadmap. As compared to his predecessor, Jaitley has not pushed the ‘pause button’ even after accepting what the analysts perceived to be unrealistic — the target of 4.1% this year. The new time path must be adhered to. I have for long argued that parliamentary approvals must be ex-ante rather than ex-post. The Finance Commission’s recommendation on creating a fiscal council is sensible. This, along with the new Monetary Policy Framework Agreement between the finance ministry and the Reserve Bank of India, would act in congruent ways.

Second, has enough been done to rationalise subsidies? There are significant gains out of rationalising petroleum and fertiliser subsidies by de-regulating petrol and diesel prices and moving over to Aadhaar-based LPG subsidy. Further action is needed on fertilisers, particularly urea. There must be pari passu progress as JAM (Jan Dhan-Aadhaar-Mobile) gathers momentum.

Third, have we made the best of improved exogenous circumstances? Oil prices have declined dramatically from $82 to $59, and so have many other commodity prices. The current account deficit is acceptable even though in the long run sluggish export behaviour needs action beyond conducive exchange rates. We could have used this opportunity to create greater fiscal space for the future. Public debt could have been retired or a consolidated sinking fund for amortising debt created. The Finance Commission suggests this can “tide over, roll over risks and the weak cash management practices”. Again a middle path has been preferred. Substantial benefit has been passed on to the consumers, enhancing their purchasing power, allowing oil companies to recoup some losses, and raising revenue. Given the opportunity, this must be pursued.

Fourth, should the 14th Finance Commission recommendations have been fully accepted? There are precedents that devolutions have been treated as awards rather than recommendatory. Consequently, total devolution to the states is now 62%, of which 42% is from a common divisible pool of taxes. In fact this implies a sharp rise in devolution to states — from `3,48,000 crore to `5,26,000 crore — and the budget estimate of non-Plan grants to local bodies of `1,08,630 crore in 2015-16 is against the revised estimate of `80,338 crore for 2014-15. This represents a sharp cut of `2,06,292 crore from the Centre’s resource block. In the shrunken resources for the central government the funding pattern of schemes has undergone a structural shift. ‘The Budget at a Glance’ highlights the middle path. It classifies public outlays into three categories — schemes to be supported by the Union, schemes to be continued with change in the sharing pattern and those fully de-linked from central support. The major flagship programmes of the government — such as the Sarva Shiksha Abhiyan, the MGNREGA and Pradhan Mantri Gram Sadak Yojna — remain on the Union list. There are others that would be financed with a changed sharing pattern. Schemes de-linked from central support, leaving it for the states to decide, are few, the most contentious being the Backward Region Grant Fund, giving resources to Bihar, the Koraput-Bolangir-Kalahandi districts of Odisha, and Bundelkhand.

There has been misplaced criticism that social sector outlays have been drastically pruned. In making such comparisons a methodological error has crept in. Analysts have compared the budget estimates of 2014-15 with the budget estimates for the current year. Those familiar with public finance know that normally the comparison is between the revised estimate with budget estimates. Such comparison would suggest that allocations have been kept more or less intact. In the case of the Integrated Child Development Scheme (ICDS), the reduction is sharp, but the pattern of funding is yet to be decided.

Thus, the budget and the Finance Commission are two sides of the same coin. It emanates from the design and conception of a new financial architecture of Centre-State relations. It is a giant step by which much larger, untied resources become available to the states. The government had little option after accepting the Finance Commission’s recommendations. After all you cannot have the cake and also eat it. States cannot have both the cake of large, untied resources and eat the centrally-sponsored schemes as originally conceived. One can argue whether this has been the best approach or the recalibration could have been somewhat different.

Will this new model of fiscal federalism work? There are inherent risks but also opportunities. But in the end, the government at the Centre and the states are judged by the improvement and development of life quality. The new fiscal architecture eliminates the form of neo-colonialism like what Rudyard Kipling described as the White Man’s Burden, viz. the Centre knows what is good for the states. We must believe that every right implies a responsibility; every opportunity an obligation; every possession a duty. A new social compact between the Union and the states has been ushered in.

NK Singh is a member of the BJP and a former Rajya Sabha MP

The views expressed by the author are personal

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