Don’t cut transfers to states: West Bengal Finance Minister Amit Mitra tells Centre in Pre-Budget 2021 memo

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January 23, 2021 5:00 AM

Union Budget 2021 India: “I urge you to call a GST Council meeting to discuss the matter and arrive at a consensus,” Mitra wrote in the latest letter.

Budget 2021-22: Mitra had in an earlier letter to Sitharaman noted that the Centre's borrowing cost under the facility is around 5%, whereas the interest rate paid by the states for competitively borrowing from the RBI auctions is as high as 6.8%.Budget 2021-22: Mitra had in an earlier letter to Sitharaman noted that the Centre's borrowing cost under the facility is around 5%, whereas the interest rate paid by the states for competitively borrowing from the RBI auctions is as high as 6.8%.

Indian Union Budget 2021-22: State governments, facing acute resource constraints and consequent squeeze on their investment expenditure, want the Centre to be liberal with the assorted transfers to them.

In a letter to the Union finance minister ahead of the Central Budget, West Bengal finance minister Amit Mitra, one of the most vocal among state finance ministers for the cause of cooperative fiscal federalism, has demanded that the Centre borrow an additional Rs 72,000 crore under the special window to make good the states’ estimated collective GST revenue shortfall in FY21, in addition to Rs 1.1 lakh crore being raised already. Mitra also asked Sitharaman not to cut back on the tax devolution to states from the divisible pool, and called for removal of the reforms conditions attached to the 1% (of GSDP) extra borrowing window accorded to states in FY21.

In reference to his own state, Mitra pointed out that during April-December 2020, the state government has received only Rs 27,944 crore as tax evolution against Rs 37,905 crore due, a 26% shortfall. He demanded an amount of Rs 20,961 crore (including Rs 11,000 crore for FY20) should be disbursed to the states “on an immediate basis”.

According to an FE analysis, though Budget FY21 assumed a growth of 21% in the Centre’s tax devolution to states, the transfers actually fell by the same rate in April-November and could plunge further in the remainder of the year as the Centre seeks to offset the extra transfers made in the initial months. The fall in devolution was much sharper than in the Centre’s net (post-devolution) tax receipts (down 8% in April-November), which is attributable largely to the pandemic-induced overall decline in tax buoyancy.

The Centre’s aggressive use of the cess route to bolster its own tax revenue has in recent years decelerated the growth of the divisible tax pool, thereby adversely impacting the states’ tax revenue. Though trend was there throughout the 14th Finance Commission award period (FY16-FY20), it was most visible in FY20, with tax transfers declining, unconventionally. In FY20, tax transfers to states were down 15% on year.

“The lower devolution to the state has caused severe strain on state’s finances at a critical time when Covid-19 induced lockdown already resulted in shrinking state revenues and increasing expenditure on healthcare and welfare schemes to provide relief to the poor,” Mitra wrote.

As far as the GST compensation to the states is concerned, Mitra noted that the Centre needs to borrow the entire Rs 1.82 lakh crore estimated GST shortfall under the special Reserve Bank of India (RBI) window and pass the funds on to the the states as back-to-back loans. Mitra had in an earlier letter to Sitharaman noted that the Centre’s borrowing cost under the facility is around 5%, whereas the interest rate paid by the states for competitively borrowing from the RBI auctions is as high as 6.8%.

“I urge you to call a GST Council meeting to discuss the matter and arrive at a consensus,” Mitra wrote in the latest letter.

Against the backdrop of the pandemic, the Centre has allowed states to borrow up to 5% of GSDP which includes 4% without any conditions. Four reform measures have been outlined which need to be met in order to borrow the last 1 % of GSDP (0.25% for each reform).“Given the state of the economy and the expected fall in GDP of 7.7% for FY21, state governments will need to invest more in capital sector projects to boost the economy. So, there is an urgent need for states to be able to borrow more to tide over the current situation,” Mitra wrote. “In such circumstances, the imposition of conditions for borrowing, further limits the fiscal space for States. Therefore, it is proposed that similar relaxation in FRBM, of at least 2%, without imposing any conditions, be allowed in FY22,” Mitra added.

Against a 30% year-on-year jump projected for FY21, budgetary capital expenditure by state governments might have dropped by a quarter in April-November, going by an FE review of data from twelve states. The slippage in states’ capex is sure to have been unprecedentedly steep and would have a negative impact on economic recovery.

Among other issues, Mitra flagged reduction in budget allocations under Centrally Sponsored Schemes (CSSs) like National Health Mission, Sarva Shiksa Abihyan, Mid Day Meal, etc. leading to increased burden of maintenance and manpower costs on the states. It is suggested that these ongoing schemes be re-evaluated and a sufficient allocation is made for maintenance as well as for costs towards manpower, he said.

“The Central government also undertook restructuring of CSS by merging and discontinuation of schemes, along with altered sharing pattern between the Centre and States with increasing burden on the state share. This has had an adverse impact on the state’s finances, nullifying the potential positive impact of the increased proportion of devolution. The sharing pattern needs to be corrected in favour of the states urgently,” Mitra added.

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