ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Pinaki ChakrabortySubscribe to RSS - Pinaki Chakraborty

New FRBM Framework

The structural inability to control revenue deficits needs different solutions from the usual argument that the utilisation of government expenditure is inefficient and that the government should spend less. It is time to relook at the way the union government spends.

Evaluating Taxation Systems and Policies

Taxation: Principles and Applications—A Compendium by Parthasarathi Shome, Lexis Nexis, 2014; pp 824, ₹ 1,495.

State Level Debt–Deficit Dynamics

An analysis of the debt and deficit of states based on the budget estimates of 2016–17 shows that almost half of them have a fiscal deficit target higher than the limit set in the Fiscal Responsibility and Budget Management Act. These states need to focus on the quality of expenditure and elimination of revenue deficit as per the framework proposed by the Fourteenth Finance Commission to enhance state-level capital spending.

Emerging Issues in Union–State Fiscal Relations

The restructuring of non-Finance Commission Grants is an improvement when it comes to scheme-related transfers. However, when 10 schemes constitute 90% of core grants, there is further scope for rationalisation of these schemes. The implications of following a sustainable debt path under the new Fiscal Responsibility and Budget Management framework in the budget indicate a larger fi scal correction at the state level vis-à-vis the union government.

Evolving Centre–State Financial Relations

After the Fourteenth Finance Commission award, aggregate transfers as a percentage of gross domestic product has increased, while grants as a percentage of GDP has declined. The centre is resorting to cess and surcharges that are not shared with the states. This would mean denial of revenue to states, which goes against the spirit of the Constitution. Further, the states have a reduced untied fi scal space, with the union’s share in Centrally Sponsored Schemes in 2016–17 (BE) being reduced. Finally, in the absence of plan transfers, post 2017–18, the focus should be to develop a framework for non-fi nance commission grants to states which is predictable and certain.

Beyond Fiscal Prudence and Consolidation

Since sustainable deficit could be different than the numeric fiscal rule, a review of the Fiscal Responsibility and Budget Management Act is timely and important. However, such a review should bear in mind that macro-stabilisation is a central function and the burden of fiscal adjustment should squarely fall on the union government keeping state debt and deficits withinFRBM limits. Maintaining the higher tax to gross domestic product ratio of last year will be key for fiscal prudence in 2016-17.

Restructuring of Central Grants

What impact has the award of the Fourteenth Finance Commission had on the resources and spending of state governments? Does it necessarily have to lead to a decline in outlays in the social sector? An illustrative and preliminary exercise for Bihar.

Finance Commission's Recommendations and Restructured Fiscal Space

Since it is neither feasible nor desirable to reduce central grants to the states equivalent to the increase in tax devolution, the award of the Fourteenth Finance Commission is certainly not revenue neutral for the union government. But the larger question is not of arithmetic but of a shift in policy towards greater fiscal autonomy to the states by ensuring more than 70% of the fund flow through the Finance Commission route and also preserving the fiscal space for the union for its own functions. It is about getting expenditure priorities right at each level of government.

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