After adjusting for cess and non-shareable excise, the states’ share of the divisible pool has been effectively reduced to 30%. The 41% recommended by the 15th FC is now a delusion
By Amar Patnaik
Budget FY22 was presented at a difficult juncture not just for the Indian economy, but for the global economy. The Union finance minister has been bold to breach the FRBM-mandated fiscal deficit targets to stimulate growth, largely by giving a strong infrastructure boost (increase in budgeted capital investment by 34%, besides cess-funded agriculture infrastructure). Admittedly, it is a budget that lifted the pall of gloom that had settled all around. It has set a definite and stable policy direction in the medium and long term for the country’s finances and economy for attracting much-needed domestic and foreign private investment.
However, a great part of responsibility of ensuring equity, both federal and citizen, is not addressed in the current budget.
The 15th Finance Commission (FC) has recommended a reduction of 1% in the states’ share of the divisible pool, to 41%, from the 42% of 14th FC, to account for the expenses for the new UTs of Ladakh and J&K, thus imposing the burden of formation of the new UTs on the states, even though it should have been borne out of the Centre’s resources. Besides, a separate, non-lapsable fund of Rs 7,000 crore recommended to be carved out of the divisible pool for security and defence of the country, instead of meeting it from the central share, has depleted the divisible pool further.
The introduction of cess on petrol and diesel and the agriculture cess further makes the sharing more iniquitous as these revenues are not shareable with the states. Cess and surcharges, which were Rs 23,000 crore in FY10, have increased tenfold, to Rs 2.32 lakh crore in FY20—11.1% in 2010 to 15.6% in 2020. In addition, in Budget FY22, the cess and surcharges on 17 commodities will be roughly around Rs 70,000 crore. Hence, total cess and surcharges are pegged at more than Rs 3 lakh crore. This is equivalent to 45% of the aggregate shared taxes. Therefore, after re-adjustment of cess and non-shareable excise, the divisible pool has been effectively reduced to 30%. The 41% recommended by the 15th FC is now a delusion. The numbers in the Budget for FY22 confirm this. The Centre has pegged tax revenue at Rs 22.17 lakh crore in the Budget. Based on that, it has pegged the share of the states at Rs 6.65 lakh crore. This puts the states’ share at a little more than 29%. The vertical devolution, which aims at correcting imbalances between the Centre and the states, is grossly failing to address it over time. If we look at the latest data, the total devolution to the states, as a percentage of Gross Tax Revenue (GTR), has declined from 32.36% in FY21BE to 30.02% in FY22BE.
The 15th FC recommends devolution based on need and equity on the one hand, and efficiency & performance on the other. However, the data says that the top five states that suffer most from devolution are mainly the low-income states, such as Uttar Pradesh, Bihar, Madhya Pradesh, and West Bengal, in the range of Rs 21,216 crore to Rs 8,892 crore. These low-income states are socially backward and have a higher need-based expenditure requirement.
Going forward, the states will have no option but to bridge the revenue shortfall through higher borrowings, affecting states’ financial management owing to higher debt servicing burden (interest payments). As per the February 9, 2021, auction, the spread between the 10-year SDL and 10-year government security was 100 bps, up from the previous auction’s 72 bps (February 2, 202) and 64 bps (January 25, 2021). The recent spike in yield of state governments’ bond is going to increase the interest burden.
The budget provides for an enhanced outlay of Rs 1,18,101 crore for the ministry of road transport and highways, of which Rs 1,08,230 crore is for capital expenditure, the highest ever. While economic corridors in the states of Tamil Nadu, Kerala, Assam, and West Bengal have been provided for, other potential states have been completely neglected. Similar discrimination exists in railway infrastructure too.
Employment: The MGNREGS has seen a 34% reduction between FY21RE and FY22BE, down from Rs 1,11,500 crore to Rs 73,000 crore. The total number of person-days of employment will reduce 17.64%, to 2.7-2.8 billion from 3.4 billion. The Centre has not introduced any urban employment initiatives on the lines for the MGNREGS even though states such as Odisha, Himachal Pradesh, Jharkhand, and Kerala are implementing them. The Union ministry of labour and employment, in FY22, has been allocated an amount that is 3% lower than the FY21RE. The reduction in funds to some of the schemes meant for giving wage employment is disconcerting. Major schemes that have seen a curtailment in their outlay include Bima Yojana for Unorganised Workers, Employees Pension Scheme, Pradhan Mantri Shram Yogi Maandhan, Pradhan Mantri Karam Yogi Maandhan, Pradhan Mantri Rojgar Protsahan Yojna, and National Career Services.
Agriculture and Textiles: In India, more than 65% of the population is employed in agriculture and allied activities; textiles in the next highest employer. But the overall outlay for agriculture has been reduced by 8% and capex in textiles by a massive 20%. The allocation for PM-KISAN has also been reduced by Rs 10,000 crore, to Rs 65,000 crore from FY21BE. This is going to affect states, too, and can push millions of people into poverty. Moreover, the allocation is dismal for the two schemes that ensure the implementation of the MSP—the Market Intervention Scheme (50% decrease from FY20) and PM Aannadata Aay Sanrakshan Yojana (73% decrease from FY20)—as also almost all the handloom and khadi schemes and programmes. All this can negatively affect the farmers’ and weavers’ incomes, leading to their further impoverishment compared to the pre-Covid period.
To conclude, the distorting of the fiscal federal structure, sidelining of agriculture and textile sector and neglecting unemployment issue make Budget FY22 potentially highly iniquitous.
The author is Member of Parliament, Rajya Sabha, from Odisha, and a former CAG bureaucrat
Views are personal