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‘There is no serious problem for the Centre on fiscal deficit’

The Centre should not have much difficulty in meeting its fiscal consolidation plan as the actual increase in tax devolution to states is only 3 to 4 per cent, said M Govinda Rao.

Written by Surabhi |
February 25, 2015 1:14:43 am

The Centre should not have much difficulty in meeting its fiscal consolidation plan as the actual increase in tax devolution to states is only 3 to 4 per cent, said M Govinda Rao, member, Fourteenth Finance Commission and Emeritus Professor, NIPFP. In an interview with Surabhi, he said that the issue of compensation has stalled GST and it is necessary to comfort states. Excerpts: 

What impact would the sharp rise in devolution have on the Union’s finances? 

We must realise there is no significant rise in the devolution. The Commission has worked out the devolution, which subsumes all transfers to states. So the increase in tax devolution works out to a 3-4 per cent rise and not more. The Commission has recommended a paradigm shift and re-balancing of government expenditure, as states should have more flexibility in deciding their development plans. But there is no serious problem for the Centre to adhere to its fiscal deficit targets.

Why has the Commission suggested replacing the FRBM Act? 

We have stuck with the fiscal deficit target of 3 per cent for the Union government and we have not recognised the effective revenue deficit as we do not want multiple targets. For states as well, we have anchored their fiscal deficit at 3 per cent of the GSDP while giving some additional flexibility. The present FRBM Act will be for five years and hence, we have suggested replacing it with the with a Debt Ceiling and Fiscal Responsibility legislation.

Given the deficit targets, what is the Commission’s view on stepping up public spending to boost growth?

The commission has no view on this. But there are a lot of measures the government can follow to boost growth and investment such as special purpose vehicles and contingency mitigation funds that are outside the Budget. The report has also called for a proper dividend policy for public sector enterprises, where in payment of dividends and transfer of excess reserves should be enunciated and enforced. States can also help boost growth. 

Do you think it is fair to base grants to local bodies giving 90 per cent weight to the criteria of population? 

The terms of reference for the Commission said that demographic change should be taken into account. So we used population data from the Census 2011 as against the Census 1974 data used earlier. The fact is that both a small and a large population require public services. Fiscal transfers cannot be the means for population control.

The Commission seems to be in favour of states with an autonomous GST Fund?

The issue of compensation stalled the entire discussion on GST. States need some comfort on compensation at least for a five-year period as we have been told that they face lot of problems in compensation for CST.

Why have you called for winding up of the National Investment Fund?

When we have such a large revenue deficit, what is the need to put money in the NIF? When there is a revenue surplus, it can be used for the NIF. So we have called for cutting down unproductive expenditure and instead curbing the deficit.

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