In six months from now, Vijay Kelkar, Chairman, Thirteenth Finance Commission (TFC), has to submit his recommendations?on how the Centre must share its resources with states over the next five years beginning April 1, 2010?to the government. He faces at least three tricky issues?that have a crucial bearing on his report?where there is little clarity. These are: the base year problem, the Fiscal Responsibility and Budget Management roadmap (will call it FRBM II since the original FRBM targets have gone awry) and the proposed Goods and Services Act (GST) which states are giving a rough ride now.
Let?s get into each of these in some detail.
The base year problem: India got a grip of the magnitude of the global financial crisis only by August 2008. Till then, most in the government were defiant and even said India will not be affected. The financial crisis had by then already spilled over to the real economy in the United States and Europe and voices that the world economy was heading for a recession were gaining credence. India ended 2008-09 with a growth rate of 6.7 per cent, still seen as modest when many countries were seeing a contraction. GDP estimates for the current fiscal vary between 6.5 per cent and 7 per cent. The TFC will require growth projections for the next five years beginning April 1, 2010. The 9 per cent growth rate projected by the Planning Commission in the Eleventh Plan (2007-12) does not hold ground now. In the second year of the Plan itself, the growth rate has dropped to 6.7 per cent from 9 per cent in 2007-08. For Kelkar to have a good understanding of the resources position of the Centre and states, the Planning Commission must give him, if it has not already, a fresh set of GDP growth estimates for five years beginning 2010-11.
FRBM II: India did little to conserve when there was a bounty. The simple lesson of preserving for a rainy day was forgotten. During the heady years of 9 per cent growth (the economy grew 9 per cent plus a year on an average between 2005-06 and 2007-08) the government could have made conscious efforts to reduce the fiscal and revenue deficits. This would have given it considerable elbow room to spend aggressively?as is required?when the economy is powering down. Mind you, Kelkar also has a mandate to provide a fresh roadmap for fiscal consolidation. But look at India?s deficit for 2008-09. Despite spending Rs 19,484 crore less than the RE (revised estimate) expenditure for the year, the fiscal deficit stands at 6.2 per cent of the GDP as against the Budget estimate of 2.5 per cent. The indications available from the finance ministry and the Planning Commission suggest that the fiscal deficit will at best be the same, if not higher, next year.
Given the experience of the past four years, it is a no brainer that Kelkar will recommend higher cuts in deficits when the economy and tax collections are buoyant instead of the annual 0.3 per cent of GDP cut as is the requirement now. Also, several below the line items such as food, fertiliser and oil subsidies have to be brought in as expenditure items in the Budget. This is again something the government could have attempted in the years when India was growing fast. The FRBM II roadmap will actually be a test of Kelkar?s practical wisdom.
GST: One would assume this would come easy for Kelkar, the principal author of the task force reports on direct and indirect taxes. But states are turning out to be the spoilsport in this biggest tax reform initiative. The Centre-announced deadline of April 1, 2010 for introduction of GST is meaningless. There are far too many uncertainties besides states? unpreparedness. To what extent states have to be compensated for the loss of revenues due to the abolition of the Central Sales Tax is yet to be decided. Further, it is not even clear if states are preparing themselves for a GST rollout. If the recent meeting of state chief ministers with Pranab Mukherjee is any pointer, even ally led states like Tamil Nadu feel there is no need to rush through a GST regime.
Even as Kelkar and his team grapples with these issues, there are suggestions from within the government and outside that the Thirteenth Finance Commission should submit a set of interim recommendations for just the balance of the Eleventh Plan i.e. two years 2010-11 and 2011-12. The Commission?s final awards can then be made co-terminus with the Twelfth Plan of the Planning Commission beginning 2012-13. Over the current fiscal and the next, there should be complete clarity on FRBM II, GST and the global economic crisis and its impact on India. The Commission will also have better set of data to work on if Yojana Bhawan interacts with it while formulating its Twelfth Five Year Plan.
?The author is national business editor, The Indian Express