The 14th Finance Commission report, headed by Y V Reddy and tabled by Finance Minister Arun Jaitley in Lok Sabha today, has recommended devolution of 42 percent of central taxes to states.
In an interview to CNBC-TV18, M Govinda Rao, Member, 14th Finance Commission, said the panel did not make distinction between plan and non-plan spends. He thinks the centrally-sponsored schemes should be reduced, besides the government needs to bring down the fiscal deficit to 3 percent from FY17.
The government can look at creating contingency mitigation fund, but should not compromise on fiscal deficit target, he said. Rao however added that the panle did not talk about GST rates.
Below is the transcript of Govinda Rao's interview with Shereen Bhan on CNBC-TV18.
Q: The government has decided to accept the recommendations as far as the 14th Finance Commission is concerned with regards to the devolution. Can you take us through the rationale behind this quantum jump? The government itself is calling this a quantum jump. Can you take us behind the rationale of this quantum jump that the 14th Finance Commission has decided to go in for?
A: There are a number of factors that have gone into the recommendations. Unlike in the past this Finance Commission's terms of preference do not ask the commission to confine itself to meeting the requirements under the non planned revenue accounts of the states which basically implies that it restores the constitutional position of the Finance Commission's task namely looking after the entire revenue expenditure requirement of the states. It is not just the non-planned, so in that sense of the term it is not 32 is not comparable to 42. You should add for 32 the normal central assistance given by the planning commission under the Gadgil formula the transfers given under the special plan assistance and quite a few of the discretionary grants which the Planning Commission was giving including the things like backward region transfer and things like that.
So, in other words it is not exactly 32 percent, if you add those it will come somewhere around 38-39 percent. In addition to that you have the grants. That is one of the things. In fact this commission has made a number of interesting recommendations in this regard, their entire approach. One is you don't make a distinction between plan and non plan.
Second thing is you don't make a distinction in the tax distribution between general category states and special category states and have a different norm. But what we have done is we have taken into account the revenue disabilities and cost disabilities of the states and in the process of doing that we have mainstream environmental issues which means for example in the tax devolution formula we have included forest cover.
So, in other words there are a variety of innovative things that have been done and strictly adhering to the constitution. Of course this also implies that the state gets much larger quantum of funds which are untied, which are general purpose transfers, which are basically block transfers which they can use. The idea is we have trust in the states.
Q: You are making a valid point and that is the point that is the point that the Finance Minister was also earlier making that you are moving away from a one size fits all approach and the state governments will now have the power to decide what to utilise their funds on. But if I could ask you the question that people want an answer to what does this mean in terms of the fiscal space for the government? Because the Finance Ministry in its releases articulated that its fiscal space will be reduced proportionately on account of the higher devolution to the states. What is this now going to mean in terms of fiscal space with the government which is already pretty much fiscally constrained and what is this then do to the fiscal consolidation road map that this government has presented with 3.6 percent being the fiscal deficit target for the next financial year?
A: The total transfers that the union government gives to the state is a decision which the union government takes. If you look at present something like 62 percent of the total divisible pool of the taxes is given by way of transfers, 32 by way of tax revolution and then certain amount something like 7-8 percent by way of other grants. The question that comes up is you can continue to give 62-63 percent you do not have to give more. But then you will have to reduce the space as far as the centrally sponsored schemes are concerned. You can re-modify the centrally sponsored schemes and then at present the centrally sponsored schemes constitute somewhere about Rs 3 lakh crore a year.
If you want to state that I want to give only 62 percent and I do not want to touch the other fiscal space then you can do, that Rs 3 lakh crore will be reduced to Rs 2 lakh crore. We still have Rs 2 lakh crore to manage within that but if you want to increase that either you will have to increases tax revenue or you will have to increase the non tax revenue or you will have to cut down the other unproductive expenditure. In fact the union government is sovereign and then it has to take how exactly it wants to go about. Now that you have given higher tax devolution, higher Delhi purpose transfers, we have trusted the states; states have the responsibility of providing quality public services, public goods to the people because they are the ones who are closer to the people.
Q: If I could come back to the issue of fiscal space at the central level, I am given to understand, this is as per what the finance ministry is has stated officially and this has been the recommendation of the commission to bring down the number of centrally sponsored schemes, we understand that the Centre will now delink about eight centrally sponsored schemes from central support. So, in that sense how much room will this actually give the government? Is there a number, is there a calculation because the centre is saying it will delink eight centrally sponsored schemes from central support. How much will this offset the outgo from the Centre?
A: I have not seen which of those eight centrally sponsored schemes they are removing. There were 147 schemes and then they were consolidated into 66 by the B K Chaturvedi committee and this 66 in terms of the volumes, in terms of the transfer there was not much of a change. Now, what you really need to do is to again- even there there is a reform needed, there is a chapter in the finance commission report which basically-the title of the chapter is towards corporate federalism and that chapter basically tells that in designing this limited number of schemes that you want to undertake, do not do 66, you have some 10-15 of them-in designing them you have the state's involvement, you have the domain experts involvement and along with the spending department, the states and the domain experts should basically design and work out the implementation scheme. There is a very detailed chapter on that.
Q: Do you think that this government ought to stick to its fiscal deficit number of 3.6 percent for the next financial year or do you believe that that need of the hour at this point in time is to pump prime the economies to stimulate growth? Where do you stand as a member of the 14 th finance commission on that issue?
A: The commission has made a very clear recommendation with regards to the fiscal targets. The fiscal targets for the next year as it was adopted by the medium term fiscal plan is 3.6 and the year after wards is 3 but not to pump prime the economy what we can do is one, the higher transfers to the state will result in a higher capital expenditures because they do not really have a serious evidence of that issue in many of the states.
More than anything else it would be useful for the Union government to start, particularly in the case of railways for example, you can have a special purpose vehicle or even for highways you can have a special purpose vehicle. You borrow money from various places, create a contingency mitigation fund so that if there is a contingent liability that is coming up you can deal with that and possibly you can take it off the Budget but the point is-of course it is a contingent liability but then you have to have an arrangement to mitigate that contingent liability if in case it arises but fiscal deficit target we should not compromise that, we should have the fiscal consolidation.
Q: Let me ask you a question on the GST because the government has said that it will study the recommendations of the 14 th finance commission on a bunch of other issues including the goods and services tax. This maybe will pave the way to get the states on board even further as far as implementing and adopting the GST is concerned. Perhaps we could now see a April 1, 2016 GST roll out. What to your mind will be an ideal GST rate?
A: This is one of the things the finance commission has abstained from getting into. The term of reference of the finance commission is very clear. The term of reference of the finance commission basically says, please make recommendations on the implications or the impact of GST on the economy and number two, what should be the compensation scheme, mechanism for compensation? The finance commission has confined itself very strictly to these issues since the entire structure of the GST has to be decided by the empowered committee along with the Union government. The finance commission has not gone into the structure of GST because it is not in the term of reference and it would be inappropriate to take away the powers of the Union and the state governments in doing that.
Q: In your personal capacity do you think that anything above 22 percent as a GST rate would in fact lead to a failure of the GST rollout because the empowered committee was talking about 25-26 percent as being the revenue neutral rate. Do you believe that that should be the ideal rate as far as the GST is concerned? I am speaking to you in your personal capacity.
A: The basic issue is whomever you ask to estimate the revenue neutral rate they are not going to err on the wrong side. They will always have a higher rate there because if you don't realise that revenue tomorrow you are going to blame them for that.
The statesmanship would require that the governments, the union and state governments should come up and say that, look, if you have to have two tax rates in central GST and state GST you have a lower rate and higher rate we should not have the rate more than 11-12 percent in the case of centre, similarly 11-12 percent in the case of the states and then the centre should come out and say, that any loss of revenue I will make up, in the sense that they need assurance. Once you do that you can move forward, but that requires statesmanship, not playing politics and that is something which we hope that will come in the near future.
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