With the Supreme Court expressing serious concerns about “the culture of freebies ahead of elections”, NK Singh, who headed the 15th Finance Commission (FC), told FE that while tax devolution is states’ inalienable right, the FC could be one of the institutional mechanisms to regulate spending on freebies, which destroy the foundation of macroeconomic stability.
He said the revenue deficit grants to states, for instance, could be linked to curbing of freebies and off-budget liabilities.
The Finance Commission, which ceases to exist after submitting its report, can also be made a permanent body or an inter-government body consisting of the Centre and states, tasked to change the commission’s grants award periodically after assessing each state’s fiscal performance, Singh said. The commission’s awards, which are usually for five years, can also be turned into annual grants, he added. These provisions will require amendments to relevant central and state laws.
In its final report in November 2020, the 15th FC allocated Rs 2.95 trillion to 17 states to eliminate their revenue deficit between FY21 and FY26. Accordingly, it awarded fiscally stressed West Bengal Rs 40,115 crore, followed by Kerala at Rs 37,814 crore, Himachal Pradesh at Rs 37,199 crore, Andhra Pradesh at Rs 30,497 crore, Uttarakhand at Rs 28,147 crore and Punjab at Rs 25,968 crore.
“The 15th FC gave a significant amount of grants to Punjab on the commitment that it will repair its debt profile and it will follow a policy to restructure the free electricity scheme. There were a few other states with similar problems. But once the commission goes, there has to be an inter-government body to monitor such issues,” Singh said. The new Punjab government has announced freebies including free electricity to each household, which might cost around Rs 17,000 crore/annum or 3% of the state’s GDP.
Hearing a public interest litigation, the Supreme Court on Tuesday asked the Centre to involve the Finance Commission on the issue of political parties inducing voters through freebies.
Former additional solicitor-general KV Viswanathan said, “The Election Commission and the Law Commission should also be involved (n the mechanism to regulate freebies). Freebies which are unenforceable promises, undermine democracy and mislead the gullible voter. Even when implemented, often they are in disregard of the Fiscal Responsibility and Budget Management Act, 2003.”
Constitutional expert Arvind Datar said that more than the Finance Commission, the Election Commission should look into the issue of such corrupt practices. “One can distribute essential commodities like items rice, flour to the needy but distribution of televisions, gold chains, laptops to individuals would not amount to public purpose and would lead only to the creation of private assets,” Datar said.
The Finance Commission’s award consist of two main categories: Tax devolution is made to states from the divisible pool of the central taxes under Article 280 of the Constitution and no condition can be attached to its release. Whereas the other component is grants including revenue deficit grants that are paid out of the Consolidated Fund of India under Article 275 of the Constitution.
“The sovereign has a right to impose conditions because grants are not entitlement, they are discretionary. A discretion, therefore, must be done annually to ensure compliance of a mechanism which can regulate freebies,” Singh said.
The 15th FC has suggested that the FRBM Act needs a major restructuring and recommended that the time-table for defining and achieving debt sustainability may be examined by a High-powered Inter-governmental Group. It also said that the Union and state governments amend their FRBM Acts, based on the recommendations of the group, so as to ensure that their legislations are consistent with the fiscal sustainability framework put in place.
The Fiscal Responsibility and Budget Management panel, which submitted its report in January 2017, had suggested that an independent Fiscal Council be set up consisting of experts to advise and assess the fiscal policy. Besides the Singh-led 15th FC, the 14th FC and the 13th FC had also recommended such a body. However, it has so far not found favour with the Centre.
“The governments need to declare their public debt every six months to the Assembly and Parliament. It is high time a federal fiscal council was set up, with mandate to look into the states’ expenditures regularly,” said NR Bhanumurthy, vice-chancellor of Bengaluru Dr BR Ambedkar School of Economics University. A mechanism needs to be developed to measure outcomes of the revenue expenditures like subsidies as not all subsidies are demerit, he added.
The most indebted states are expected to remain stressed for the next five years, the Reserve Bank of India said in a report recently. Debt-GSDP of Punjab was the highest at 53.3% in FY22RE, followed by Rajasthan at 39.5%, Bihar (38.6%), Kerala (37%) and West Bengal (34.4%). The general government debt to GDP is estimated to be 85-90% of GDP in FY22, as against a prudential level of 60% (40% Centre and 20% aggregate for states).
“The RBI can also play an important role in tandem with the Fiscal Council of India (if set up) as state development loans are raised through its mechanism,” Singh said.
Recently, the Centre tightened borrowing norms for the states by including off-Budget liabilities as part of the states’ annual net borrowing ceiling, which resulted in some states losing a portion of their quota for FY23, as the Centre adjusted a portion of such off-balance sheet debt in this fiscal’s limit.