‘Part of China’s heft has also to do with its large reserves’
With greater mandatory (untied) transfers from the Centre, states will now be part of a “mutual accountability mechanism” anchored by the NITI Aayog, chief economic adviser in the finance ministry Arvind Subramanian said. Speaking at the Indian Express Group’s Idea Exchange programme on Monday, he said an emergent “different political set-up” would usher in not just cooperative federalism but also competitive federalism.
Lauding states for observing fiscal prudence, even giving the Centre competition on this front lateley, Subramanian said if not hard budgetary regulations, “some sort of softer constraints or disciplining mechanisms”could co-exist with the incipient competitive federalism. “Mutual accountability and some collective self-monitoring have to be there,” he said, adding that this indeed did not mean “harsh conditionalities”.
“The days of the Centre dictating the states are gone,” he said, but said some “soft obligations” might be needed on the states when it came to spending the funds devolved.
On the issue of whether a weak or a strong rupee was needed to give a boost to exports, Subramanian said that while it was difficult to say what the exact value of the rupee should be — it depended on what period was being looked at — there was no doubt few countries with uncompetitive exchange rates had grown their exports in the post-war world. On the $750 billion forex reserves the Economic Survey 2014-15 had suggested, he said this would have to be done over several years. He said that, apart from the size of its economy, some part of China’s heft had to do with the size of its forex reserves.
The economist, who propounded incrementalism coalescing into ‘big-bang’ reforms in the survey, argued for a reduction in priority sector lending (PSL) targets that burden Indian banks. Observing that lenders were “afflicted by double financial repression” — low returns on advances due to high inflation and stringency of obligations like PSL and the statutory liquidity ratio — he said: “One option is to do it the aggressive way and reduce the PSL. The other is to bring more and more areas into PSL until at the end, practically everything in the economy is a priority.”
Banks, as per PSL guidelines, have to ensure that 40% of their aggregate lending is to exports, agriculture, micro-credit as well as other economically weaker segments.
Highlighting the Rs 70,000-crore (0.3% of GDP) additional spending on infrastructure sectors in the recent Budget, he said this coupled with larger capital spending likely by states would impart the much-needed push to the economy form public investment. Unlike the last 10 years, when the axe invariably fell on capital expenditure, there was now a “very strong belief shared at all levels that public investment will happen”, he said. “There is a conviction that public investment has to be the way forward in the short term, because private investment is still weak.”
On the recurrent, huge slippages from revenue targets set in recent years, he said that in the light of the experience, the tax buoyancy estimate (0.85) that underlie the FY16 Budget was much more conservative. As far as capital receipts are concerned, he said the failure to meet the disinvestment target in the current fiscal was partly due many companies selected belonging to the commodity sector, witnessing a plunge in prices. Disinvestment next year, he said, would be executed in an “opportunistic” manner, without a pre-approved list of companies. With strategic disinvestment budgeted, the possibilities, he said, were “large.”
The Centre has budgeted to transfer total resources of Rs 8.76 lakh crore to states (excluding Union territories) in FY16, up from Rs 7.29 lakh crore (revised estimate) likely for FY15. These resources include, apart from net resources transferred to states, the investment in state securities from the National Small Savings Fund. Thanks to the 14th Finance Commission award, about 63% of the resources to be given to states in FY16 will be in the form of devolution of their share of taxes and duties, and 37% as other grants, while the corresponding figures for FY15 were 49% and 51%.
However, the increase in states’ share of central taxes includes various kinds of central Plan transfers and the aggregate transfers to states as a percentage of the divisible pool will go up only marginally to 62.75% in FY16 as against the Budget estimate of 61.88% for FY15.