The government’s partial acceptance of recommendations from the 13th Finance Commission signifies an intent to fix its finances rather than a determination. The higher devolution to states from central taxes and bigger grants should tide over a part of the salary hikes they will announce in the wake of the Sixth Pay Commission award. The lion’s share of state budgets is devoted to payroll and they tend to bankrupt themselves in an effort to maintain parity with central government employees. Likewise, the Centre is okay with continuing cheap loans and debt write-offs to states announced by the previous Finance Commission. But it needs time to think about borrowing limits on states to bring down their fiscal deficit to 3 per cent of the combined state domestic product by 2014-15. And it needs more time to think deeper before it decides to stop lending to fiscally errant states.
The commission sets tougher targets for the Centre: it wants the revenue deficit eliminated and the fiscal deficit reduced to 3 per cent of GDP by 2013-14. This is accompanied with a roadmap to reduce the national debt from 75 per cent of the GDP now to 68 per cent in five years. The finance ministry feels the latter target can be met; its prognosis for the revenue deficit is distressing. By 2012-13, the Centre reckons it can cut the revenue deficit to 2.7 per cent of GDP, against the deeper 1.2 per cent suggested by the Finance Commission. Pranab Mukherjee has managed to tame revenue expenditure this year because the pay commission’s award and a debt waiver to farmers have been paid out. Further tightening will mean taking the axe to subsidies, principally the energy dole, which comes up against trenchant opposition.
But the big deal, the goods and service tax, needs to be handled with even softer gloves. The levy that will make India a common market will also take away the discretion of states accustomed to half a century of tax arbitrage. Expectedly, the uniform tax has overshot its 2010 deadline despite the Rs 50,000 crore sweetener thrown in by the Finance Commission. States are yet to decide for themselves a revenue-neutral rate that the commission wisely refrained from recommending. This for a self-policing tax that could knock 1.22-2.53 per cent off retail prices and bump up economic growth by 1.5 percentage points a year. However, take heart. In Mr Mukherjee the Centre has its wisest interlocutor to get the uniform tax off the ground.