Indian Fiscal Federalism
MUMBAI: On 19th March, 2019, Asia Society India Centre, in partnership with Oxford University Press, had the honour of hosting Shaktikanta Das, Governor of the Reserve Bank of India; Y V Reddy former Chairman of the Finance Commission and former RBI Governor; G R Reddy, Financial Advisor to the Government of Telangana; Sudhir Shrivastava, Chairman of the Maharashtra Pollution Control Board; Neelkanth Mishra, Managing Director and Strategist, Credit Suisse India and Prachi Mishra, India Chief Economist and Managing Director of Goldman Sachs for a discussion on Dr. Reddy’s new book ‘Indian Fiscal Federalism’. Niranjan Rajadhyaksha, Research Director and Senior Fellow at IDFC Institute moderated the discussion.
The programme commenced with a keynote address by Shaktikanta Das, who gave his first public speech as the Governor of the RBI in Mumbai. In his opening remarks, he advocated for a permanent status for the Finance Commission. Das further spoke on 5 important issues concerning the state of fiscal federalism in India – the need to ensure broad consistency between the consecutive finance commissions; ensuring the formation of state finance commissions every 5 years and promoting their robust functioning; fostering a spirit of co-operative federalism among states; also promoting competitive federalism among states and the prioritisation of robust expenditure planning to address social and economic concerns affecting the centre and the states without compromising on fiscal targets.
The discussion began with Y V Reddy sharing his experiences as the former RBI Governor and Finance Commission Chairman. When asked about Indian fiscal federalism being at crossroads today, Reddy spoke of the evolution of finance commissions and the tax structure, and how it has signified continuity and change. He further went on to add that the Goods and Service Tax (GST) and the 14th Finance Commission were notable game changers, which along with the discontinuation of the Planning Commission significantly changed the nature of fiscal federalism in India.
On the matter of state finances, Neelkanth Mishra remarked that it was important to study state budgets as businessmen and citizens mostly interact with state governments, in terms of governance and taxation. Aggregate spending by the state government has significantly increased and is now 90 percent more than the centre’s expenditure today. He also added that it was the right time to allocate more freedom and discretion to states in fiscal expenditure, given their many differentiated needs.
With regards to the issue of vertical and horizontal allocation of money among states, Prachi Mishra started by providing a historical context to the rationale behind active state intervention in the economy. Post-independence, the government’s objective was to promote an egalitarian society and balanced approach to development. However, 70 years later, poorer states have not been able to catch up and convergence has not taken place.
On the ineffectiveness of state finance commissions and empowering the third tier of government, Sudhir Shrivastava referred to the constitutional amendment that allowed state governments to devolve certain functions to the third tier. However, the process for this transfer of responsibilities has been rather slow. The performance of third tier government bodies has been varied across states. In a state like Maharahstra due to the poor allocation of finances, as local governments such as zilla parishads and panchayats are not independent because they receive 97 percent of their funds from state and central grants.
When questioned about the assessment of GST Taxes and the GST Council’s records, G R Reddy referred to the suggestions of the 13th Finance Commission task force and the Revenue Neutral Rate Committee under Arvind Subramaniam which recommended a tax rate of 7 percent for states and 5 percent for the centre. On GST compensation, G R Reddy was of the view that the centre was collecting a lot more revenue than what was warranted, by adding many more new cesses which have replaced the old subsumed ones. He later added that the government has now effectively neutralized the simplicity of the tax system, which was initially progressive in terms of fiscal federalism.
As reported by Deepashree Mahajan, Programme Assistant, Business and Policy, Asia Society India Centre
Watch the complete programme here - (1 hr 29 mins.)
https://www.youtube.com/watch?v=vExh7WZtgJ4&feature=youtu.be