Though State governments claim that the terms of India’s fiscal federalism is loaded against them, the States “decidedly” have a good deal, with more spending power, share in the total pool of central taxes and autonomy to spend. However, the Central government has its own faults, such as collecting taxes in the form of cesses and surcharges that it does not have to share with the State governments, unilateral centrally sponsored schemes and its role in competitive populism, said Duvvuri Subba Rao, former Reserve Bank of India (RBI) Governor.
Rao was delivering the 17th V Shankar Aiyar Memorial Lecture (in memory of the father of Congress leader, Mani Shankar Aiyar), on ‘Is India’s fiscal federalism loaded against the States?’ The lecture was organised by the Southern Indian Regional Council of the Institute of Chartered Accountants of India. V Shankar Aiyar was one of the founding members of the institute.
Rao mentioned four points as States’ contention—they have larger responsibilities to spend, the Central government does not provide enough funds, and does not allow enough autonomy in spending, and States’ powers to borrow are restricted. He said that these points were “debatable”.
Big picture
Observing that the ‘big picture’ was different, Rao said that in India, States’ share in combined (Central plus States) expenditure was 63.9 per cent, much higher than in most other countries. He gave the examples of Brazil (40.2 per cent), Indonesia (37.9 per cent), Australia (40 per cent), and the USA (40.1 per cent). In India, States collected 40 per cent of the total revenues but accounted for over 60 per cent of the total expenditure, Rao said. Pointing out that spending gets political gains while taxing does the opposite, he observed that “States had the pleasure of spending without the pain or taxation.”
Also, initially the States could get a share of only income tax and excise duty, but in 2000 many other taxes, such as customs duty, were added to the divisible pool, he said. Furthermore, they have more autonomy in spending unlike earlier, when they had to go to the Planning Commission for permissions.
Nor could the centrally sponsored schemes be regarded as infringement on the States’ rights because under Article 282 of the Constitution, the Central government had a right to spend directly on public schemes. Similarly, restriction of States’ powers to borrow has been written into the Constitution. Although, under the Constitution, the Central government had the right to impose conditions on States’ borrowing, it has “never ever” done so, Rao added.
On the flipside, he said that the Central government was not right in increasing taxes through cesses and surcharges and called for a ceiling on such levies. He also said that the it should necessarily consult the state governments while bringing in centrally sponsored schemes or at least give a menu of schemes for States to choose from. He also said that there was an urgent need for a ‘code of conduct’ for giving away freebies.
