Incentivise States for disinvestment in public sector enterprises: Finance Commission chief


N.K. Singh appreciates Centre says besides; ₹1.5 lakh crore over 5 years from the Consolidated Fund, monetisation of Defence land will also help generate resources, he says.

The Centre should incentivise States to come clean on their fiscal deficit positions, bring off-Budget liabilities above board and take up their own strategic disinvestment programmes for myriad State-owned public sector enterprises, Fifteenth Finance Commission Chairperson N.K. Singh mooted in an interview with The Hindu.

Terming the central government’s decision to “transparently” acknowledge a fiscal deficit of 9.5% of GDP this year as “a very positive development”, Mr. Singh said the Centre could incentivise the States to adopt a similar practice as this would enhance the confidence of investors in India’s overall debt and fiscal deficit trajectory.

In the interview, Mr. Singh also explained the rationale behind the key recommendations of the Fifteenth Finance Commission.

The Centre has accepted the recommendation to share 41% of the divisible pool of taxes with the States and is examining the panel’s views on creation of a non-lapsable Defence and Internal Security Modernisation Fund.

Edited excerpts from the interview:

‘Defence fund to tap Gross Revenue Receipts not tax revenue’

What was the Commission’s overall approach?

I would say the emphasis on continuity and stability. This is reflected in the continuity of the 41% share (factoring in J&K’s change in status), giving revenue deficit grants.

One more component of stability is the horizontal formula and the percentages assigned to different weights at more or less what they were, with very marginal change by increasing the forest cover criteria. But the use of the 2011 Census would have meant many of the States who have done better on demographic management might have suffered, if we had done no corrections.

Therefore, we introduced a new criteria of demographic management by assigning a 12.5% weightage, and if States still suffered, we have tried to mitigate that by a revenue deficit grant which covers many of the States like Andhra Pradesh, Kerala and Telangana.

We have sought to therefore evenly balance, on the weightages side, the triple consideration of equity, need and efficiency.

The second important thing is the reprioritisation of the expenditure pattern. With our current health infrastructure given the pandemic, we have assigned a very specific treatment of the resources to urban local bodies towards improving health infrastructure of primary health centres and district hospitals.

Unlike in the past, the fiscal consolidation roadmap for the Union and the States have been made somewhat flexible and introduce a range instead of a fixed point, recognising that the State finances may be in stress, even though State FRBM laws assigned a certain fiscal deficit target, we have given them one percentage point more — 4% instead of the 3% of GSDP, and an additional 0.5% for undertaking power sector reforms. If any of the States have to undertake fresh borrowing on account of liabilities arising out of the GST compensation cess, that would be over and above the flexibility we have given now.

As far as the central government is concerned, we have given a certain roadmap over a medium term.

We have recommended that we need a new fiscal consolidation plan, a new debt trajectory, and the constitution of what I have called an inter-governmental body. In the action taken report, the ministry has said that they are going to examine this proposal separately.

Could you could provide us some clarity on the Defence and Internal Security Modernisation fund for which you have suggested about ₹1.5 lakh crore be shifted from the Consolidated Fund of India over five years? Should States be concerned that this might shrink their share of the divisible pool?

None of this is coming from the Gross Tax Revenue, but the Gross Revenue Receipts. And we have already calibrated it without touching the GTR or the options of a cess or a surcharge or a defence tax.

But we stayed clear of that. I wanted to come clean on that.

We have taken this from the GRR but we were persuaded by the erudite legal opinion of Mr. K. Parasaran on the indivisible obligation of every stakeholder to become a partner in strengthening the defence of this country.

Historically, there has been a mismatch between the procurement cycle and the financial allocations on an annual basis.

We need to give a degree of stability on availability of resources for meeting capital expenditure for Defence is what we came to the conclusion on this term of reference given to us; that this would be the path forward.

While one component comes from the Consolidated Fund, there is a very significant part which will come from the monetisation of idle land assets — defence is the biggest holder of land.

They can use that for their own benefit and the proceeds of the disinvestment from the public sector defence enterprises. This is ₹51,000 crore per annum for defence and ₹10,000 crore for the Ministry of Home Affairs for strengthening the capital expenditure of forces like the ITBP and BSF, which are also engaged in defence, and a small amount which we have given for the Jawans’ Army Welfare fund.

We were the only Finance Commission to have had the opportunity to go to Leh and see the war memorial for the Kargil martyrs and were happy to be able to grant them something.

The Commission didn’t make a particularly strong push for a Fiscal Council…

The 12th Commission had done it, the 13th did it, the 14th had done it. We have also done it, but we haven’t written a lot of poetry on it.

Notwithstanding the wide-ranging recommendations, despite these exceptional times, the government has honoured [the panel’s] recommendations and not rejected any recommendation.

You’ve talked about the need for an overhaul of the GST structure and also a communication mechanism between bodies like the GST Council and the Finance Commission.

We have a number of suggestions in improving the both the framework and procedure of the GST and I think some of the changes are taking place. They have taken steps on invoice manipulation, improving the technology platform and the need to improve compliance as there is a huge gap. Beyond this, there are other issues that nearly go back to the basic structure. We have recognised that multiple rates are really not optimal, but having one single rate may not be optimal too. We have to do away with inverted duty structures without raising the overall incidence of the GST, we need to rationalise it and move in the direction of being genuinely revenue neutral. This is connected with State finances as several State levies are now embedded in GST and they are important partners in ensuring GST’s success. Finally, we have suggested that in the long run, there needs to be more active consultative mechanism between the GST Council and the Finance Commission — both are constitutional bodies with the Council existing in perpetuity and the Commission being a non-permanent body, that is appointed every five years. The Commission is deeply involved in assessing the finances of the States and the kind of resources that they can seek from GST and therefore, this is perhaps today one of the most important ingredients of State resources as well. Similarly, I think the GST Council needs to needs to understand the working of the Finance Commission’s assignment of resources. So a robust consultative mechanism between the GST Council and the Commission will help. The Finance Minister has mentioned many of these things in context of GST in her Budget speech and the Finance Secretary has said these would receive the priority attention of the GST Council.

Your proposals rely on conditional grants for urban local bodies…

First, the Finance Commission is not obligated to provide any resources whatsoever for the third tier-bodies. But we went by past practice and have provided a significant increase in the third tier. But we felt the need to ensure that outlays serve and are symmetric to priorities like the strengthening of the health infrastructure, sanitation, treatment of faecal matter, drinking water, rainwater harvesting. For tier-I cities, namely the urban local bodies of cities with a population of million plus, half the resources will be based on the air pollution index and environment. All these, I think, are quite congruent to national priorities.

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