States seek fiscal leeway to boost infra spending

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New Delhi | December 27, 2014 1:07 AM

Taking cue from the Centre, which recently hinted at a review of the mid-term fiscal...

If the Centre and states enhance public spending, it would indeed give a fillip to the economy where private investments are dismal. (Reuters)If the Centre and states enhance public spending, it would indeed give a fillip to the economy where private investments are dismal. (Reuters)

Taking cue from the Centre, which recently hinted at a review of the mid-term fiscal course to augment public spending in a struggling economy, states have sought a temporary leeway in meeting their fiscal responsibility and budget management obligations.

At a pre-Budget meeting with the Union finance minister Arun Jaitley here on Friday, many state chief ministers and FMs said that they may be required to raise the fiscal deficits of their respective states for a brief spell, given the need to borrow more for infrastructure spending.

In the mid-year economic analysis released last week, the Centre said its fiscal deficit target of 4.1% of GDP for 2014-15 was challenging given a lower-than-expected revenue buoyancy.

The states’ demand is significant as most are in a relatively better financial situation than the Centre.

This is because they have, over the past three to four years, strictly adhered to the fiscal consolidation road map mandated by the Thirteenth Finance Commission.

While the Centre’s fiscal deficit target of 4.1% of GDP for this fiscal looks challenging, as per the RBI’s latest annual report on state finances, a reduction in the ratio of the states’ gross fiscal deficit to GDP to 2.1% is budgeted for 2013-14 (2.3% in 2012-13) and revenue surplus is budgeted in 22 out of the 28 states. Apart from the buoyancy in the states’ own tax and other revenues, the hike in transfers from the Centre have helped states manage their finances, with only some like West Bengal, Punjab and Kerala facing serious fiscal problems.

If the Centre and states enhance public spending, it would indeed give a fillip to the economy where private investments are dismal, but higher fiscal deficits for a sustained period could stoke inflation, which currently appears to have more less been brought under control.

The states have also sought enhanced discretion in the use of funds given to them under centrally sponsored schemes. “Most states also wanted decentralisation of the centrally sponsored schemes so that these could be more attuned to each state’s needs. We will keep all these suggestions in mind while formulating the Union Budget 2015-16,” Jaitley said after the meeting.

Jaitley’s discussions with state heads comes in the wake of the recent move to set up a think tank of state chief ministers, independent experts and the prime minister himself that would replace the Planning Commission that represented centralised planning. Prime Minister Narendra Modi had recently said the ‘top to bottom’ policy planning has to change to ‘bottom to top’.

In fact, the trend of giving greater autonomy to states in executing projects had started during the previous UPA government itself. UPA finance minister P Chidambaram’s 2014-15 interim budget had acceded to states’ long-standing demand of transferring more funds straight to state treasuries rather than to project implementing agencies. Of the central assistance for states and Union territories, the component of funds that goes straight to state treasuries is budgeted to be Rs 3.39 lakh crore for 2014-15, against Rs 1.19 lakh crore (revised estimate) in 2013-14. The number of centrally sponsored schemes has also come down to 67, and the plan is to further reduce their count.

Jaitley recently said the requirement of each state was different and they knew what suited them better. The strategy, therefore, was to empower states as there can’t be a universal scheme that fits all, he said.

As for demands from individual states, Punjab finance minister Sardar Parminder Singh Dhindsa said his state may need to keep a fiscal deficit of 3.5% of the gross state domestic product for 2014-15 against the budgeted 3%, due to subdued revenue buoyancy. The state also asked for an economic package akin to those given to hill states. Bihar finance minister Bijendra Prasad Yadav said the fiscal deficit target of 3% of GSDP puts brakes on the state’s development effort and, therefore, the limit should be raised to 4%.

Gujarat finance minister Saurabhbhai Patel said minimum alternate tax (MAT) for corporates should be reduced to 5%. Tamil Nadu chief minister O Panneerselvam said that the practice of effecting mid-year cuts in Plan transfers to states should be stopped. He also made a strong case for an urban housing scheme, expansion of the Chennai Metro Rail project and an interest subvention scheme for small and medium-scale enterprises.

A finance ministry statement issued later in the day said that mineral-rich states called for removal of export duty on iron ore, while some others asked for tax holidays to attract investments. Some states asked for more funds for urban development and a provision for remunerative price mechanism for agriculture produce in lieu of the minimum support price.

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