Fifteenth Finance Commission Chairman NK Singh said the Constitutional framework defining the federal structure needs to be revisited in light of the changes that have taken place over the years. In an interview to Sunny Verma and P Vaidyanathan Iyer, he said the Commission, in the backdrop of Covid-19 pandemic and its impact on the economy, is debating whether there is a need for a different approach in determining the targets for fiscal deficit and debt consolidation. Edited excerpts:
Over the last several years, one is seeing more and more politicisation of the federal structure of Indian polity? How do you explain this? What is the way forward?
We need to revisit in a more fundamental way the 7th Schedule of the Constitution. The 7th Schedule of the Constitution divides broadly the subject into Union subjects and state subjects and those which are on the concurrent list. Over a period of time what happened is that this got increasingly eroded ever since that executive order was passed constituting the Planning Commission in 1951. Now there is a need to fundamentally revisit the 7th Schedule and have a holistic view. Second, the misuse of Article 282 of the Constitution, read with the 7th Schedule, which says that the Central government or the states may make any grant for any scheme or project in public interest. All Centrally Sponsored Schemes which came up then, quite a few of them strictly happen to be in the domain of states (as per reading of the 7th Schedule) but through the mutual consent mechanism exercised under Article 282. Then the third dimension to it is the standalone entitlement driven legislation of the Parliament — the Right to Education Act, then standalone legislation of food and employment. It already makes it very murky. I have argued that these kinds of very cosmetic classification have outlived their utility and we need to revisit the drawing board … After the abolition of the Planning Commission, I certainly believe that both the concurrent list, 7th Schedule and Article 282 require an in depth holistic review. Federalism as a philosophy, which is highly, highly desirable for a complex country like India must go beyond partnership which is not embedded wholly in fiduciary obligations.
The national government is seen to be getting stronger, playing a role in many state subjects including health and education. How do you see this trend?
I think that two things have happened globally. Most important is that governments derive their legitimacy from the sovereignty and the will expressed by the people through parliamentary democracies. The fundamental basis of social contract as done by John Locke and Hobbes is that the right to rule is with the consent of the people. So this ultimately is the issue: what do the people of India want … People wish to express their aspiration in one form or the other, the kind and nature of governance that they have. Second point is that globally we pride ourselves in that we follow Westminster’s model of democracy … I find that there has been a great erosion in the mother of the Westminster model, which is the United Kingdom. National elections are won or lost on the basis of who is projected as the leader of the intended party. So what has happened is that over a period of time in India also, is that in order to impart political stability to the governance, people have opted for who is the leader and particularly for national elections on whom you wish to repose trust.
You have been engaging with states across the board. After the pandemic, what is their feedback regarding the damage to their economies?
The pandemic has certainly highlighted the distress of the Union and the states. Certainly both the Union and states have been stressed at a time when their revenue targets are not likely to be met. How should the Finance Commission go about addressing it, one of the chapters (in our report) is Pandemic Times, Analysis for the Future which is about to be finalised. This chapter is really designed in some ways for the consciousness of the Finance Commission and what needs to be specifically done to address the issues arising out of the pandemic. Clearly, the health infrastructure in the country has been systematically neglected. Our public outlay on health, unlike in comparison to other peer group countries and those with similar per capita income, is less than 1 per cent of GDP out of which about 0.65 per cent comes from the states and about approximately 0.3 per cent comes from the Centre. One of the things the Finance Commission is seriously considering is how within the fiscal framework, how can the health issue be addressed by three things. One, reprioritise the expenditure; two, seek the state and the Centre to increase public outlay, and direct sectoral interventions in the sector. Finally, shall we at times of such stress not look at a somewhat different framework in determining the ballparks for borrowings, namely the targets for fiscal deficit and targets for debt consolidation.
In times like these, should there be much higher counter cyclical expenditure and some flexibility around fixed FRBM targets?
It’s a very difficult and complex question. I do not think that this year and perhaps even next year, what is necessary for livelihood and what is necessary for addressing the issues of pandemic deserves the kinds of constraints which the FRBM places. Perhaps it will be a no-brainer that the rigidities embedded in the FRBM law, this is not a time for that, this is a time for forbearance. This is not a time for rigid adherence. Second, in the deliberations of the FRBM committee itself, there was a robust debate on whether fiscal deficit and debt target should be a fixed point, or whether it should be range for both. That time the majority of the Committee (which I headed) view was that in a Parliamentary democracy, if we give a range there would be a tendency to operate at the upper end and therefore a fixed point was better. Similarly on the debt, there was a viewpoint, that instead of having debt as a main macroeconomic anchor we should go for primary deficit — which really is fiscal deficit net of interest. I felt that would be shutting out the market completely, therefore, we recommended having debt as the primary macroeconomic anchor and fiscal deficit as the enabling target. Both these premises need to be revisited because the need to recognise that fiscal range has a lot of merit in it and that the direction of the debt is as important as the absolute debt targets themselves. There is a robust debate in the Commission on whether we should look at a range instead of a fixed point on some of these constraints. Certainly, this is not the time to worry too much about fiscal rectitude. The danger is flexibility is much easier than coming back to the path of fiscal rectitude, exits are easier from rules than re-entry into compliance. Therefore, while recommending flexibility you really end up seriously impairing the hard-won battle on macroeconomic stability, for which I must really give credit to Prime Minister Narendra Modi because he has withstood the successive years of pressure to relax the fiscal deficit. Because he recognises its implications for long term macroeconomic stability and he also recognises that expenditure outcomes remain more elusive in the sense of qualitative assessment of expenditures per se. Therefore, I think without really impairing that, if there is need to bring in some flexibility, this is something which the Commission is seriously considering.
How will you factor in extreme uncertainties in your assessment, could there be year-wise devolution target?
It would be extraordinary if devolution percentages were to vary for each year of our award. This has never been done. It will lend a measurable uncertainty and volatility. The advantage of having a five-year award is the predictability and stability it brings. Therefore, before we begin to vary the devolution itself over this period, we have to tread with very great caution. We do not want to inject more uncertainties than the pandemic itself and the current economic situation may have done for the states. Second, the issue is how we calibrate the path. Now it’s clear that most Finance Commissions had the advantage, the opportunity and the luxury of making constant projections of both growth and tax buoyancy for the entire period. We do not unfortunately have that luxury due to the current pandemic. We, therefore, had to look to recalibrate growth rates in each period and to look at the consequential revenue buoyancy … we have to agree on a figure on the next year’s rebound, and then we have to factor in return of normalcy in following years.
States are worried they may have to fund defence expenditure.
It was a deep recognition that the defence of India needed a very serious attention even before the current issues with our neighbours. All I can say is that at this stage we are seriously engaged in addressing this issue, in recognising that defence of India is indivisible responsibility of the responsible Indian citizen.
Many states have sought 50 per cent tax devolution. Are you sympathetic to that view?
There is an old saying that you think where you sit. We as a Finance Commission do not want to leave behind a legacy which in any way contradicts the image and the symbol on the cover of the Finance Commission — (which depicts) the states and the Centre on the two ends of the scale i.e., 50:50.
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