This is the first Finance Commission in the age of goods and services tax. How have your interactions been so far with states regarding GST?
We have completed our discussions with all but five states. We will now go to Chhattisgarh, and after that we have Uttar Pradesh, Sikkim, Rajasthan, Goa and with J&K. The discussion with the states has been informative and interactive.
Three-four issues have come up, which are somewhat of a generic character. One is the future of the GST.
States are not very sanguine, whether they will be able to improve their revenue buoyancy significantly. They are concerned that the 14 per cent compensation guarantee has an end date, which covers only two years of our award, beyond which they feel there is a cliff waiting for them. Most of them have pleaded that the GST
compensation to cover the entire five-year award period of FFC, i.e. 2025. That is an issue on which the GST Council will decide. As far as we are concerned, we are only factoring in the predictable period. We are still assuming that the GST compensation will not extend beyond its current end-date.
There are many concerns, primarily what do we do with states where trends show that they have not been able to meet their GST targets. There are two options, one that they cut back on their expenditure and two, that they improve their own tax revenues beyond GST. Overall, it is true that there is a degree of uncertainty and concern over GST collections of the state. We have requested the Finance Minister for an opportunity to interact with the GST Council. Her responses have been favourable and we hope to have that meeting soon.
You headed a committee on fiscal consolidation. Now, as head of the 15th finance commission, how would you recommend ways on fiscal consolidation for both the Centre and states?
The FRBM (Fiscal Responsibility and Budget Management) Act, 2003, was amended in the Finance Bill, 2018. It accepted the important recommendations of the FRBM committee — regarding debt as the principal macro-economic anchor, debt-GDP to be 60 per cent for the country (40 per cent for the Centre and 20 per cent for states) and escape clauses would be confined to 0.5 per cent of the GDP in exceptional circumstances and the terminal date would be five years after the adoption of the report in 2018.
Towards this, fiscal deficit was to be calibrated at three per cent of GDP, going down to 2.5 per cent in the terminal year. These were all accepted in the Finance Bill, 2018. It is not the intention of the Commission to re-write the FRBM Act, which Parliament has already approved. States have enacted their own FRBM Acts and most states have done so along the lines of the 2003 Act.
There has been much greater tendency and compliance to adhere to the three per cent of the fiscal deficit target. But, quite a few states are close to adhering to the 20 per cent debt target and quite a few are misaligned with it. We will have to give a disaggregated debt trajectory for the states. There are some states where debt to state GDP is over 40 per cent. To expect that they will come to 20 per cent by 2024-25 will not be very practical.
A number of states are asking that the devolution be increased from 42 per cent to 50 per cent.
Frankly, that was a view on which the commission is yet to take a decision. To some extent, it is already more than 50 per cent for the states, if you include the revenue deficit grants, all payments on account of national and state disaster funds, all state-specific grants if we choose to give, and all the devolution, which goes to urban local bodies and panchayats. And then finally the Rs 3.5 trillion which goes as the Centre’s contribution to centrally sponsored schemes.
The arguments to increase the devolution above 42 per cent doesn’t take these things into account. The commission is yet to take a final call.
The Terms of Reference (ToR) require you to examine whether performance-based incentives can be brought back.
The states have a disaggregated view on performance-b0ased incentives. What they are very clear on is on the horizontal formula, there should not be any condition imposed on them. On the non-horizontal part, any way it is not their money. The constitutional argument is that one who gives the money has a certain latitude on how that money is to be utilised.
We are still examining on how the TORs regarding the performance-based incentives are going to be addressed from two or three points of view. These are, whether the condition is desirable. Second, if the criteria can be transparently determined and measurable and third, if it is and if we choose to proceed in that direction, what kind of conditions should be imposed.
When you meet the GST Council, will you talk about bringing in alcohol, petroleum products and parts of real estate?
These are matters that have been left to the GST Council. We are both constitutional bodies. We have to respect each other’s acceptability and jurisdictions.
Grants to urban local bodies and panchayats were not there in terms of reference of the 15th finance commission. But it seems that the commission is looking at these issues. What is the thinking of the FFC behind this?
If you look at the Constitution, the finance commission is not obliged to give any resource transfer to the third tier.
The basic obligation under provisions of the Constitution is that of the state finance commissions and the state governments acting on the recommendations of the state finance commissions. That has not been a very happy story so far. Many states are in different stages of compliance or are in deviation of this broad norm. That is an area where we want to emphasise that the constitutional obligation on the states is paramount and should be really accepted. We will like to make some recommendations in that direction.
Have you been able to address the concerns of southern states that the term of reference relating to the latest population census may work against them?
I don’t know whether I have been able to address because that I can only say when I decide what to put in the report. The ToR to us asks us to use 2011 census if we choose to use population as a surrogate or as an ingredient. This is unlike ToR of the 14th finance commission, which gave some latitude as to which census figures were to be used. They chose to use a mix of 1971 census and 2011 census. But ToR also asks us to look at what incentives can be given to states which have improved their demographic performance by taking various measures. )