Bypassing the States Once Again

A reduction of the fiscal deficit to ensure higher and noninflationary growth has been the underlying doctrine of the central government’s fiscal policy in India for quite sometime now. The states have had to bear the burden of the fallout of this policy of the central government and of successive finance commissions. As in the past the Union Budget for 2011-12 has proposals and policy measures that will have a direct impact on the fiscal health of the states and also impinge on their autonomy.

In recent years, save during the height of the global financial crisis (2008-09 and 2009-10), buoyant revenues have enabled the centre to avoid expenditure compression and at the same time narrow the fiscal deficit. As pointed out in these columns last week, Budget 2011 may have gone too far in pursuit of fiscal consolidation and may have ended up with exaggerated estimates of a high growth of revenue and low growth of expenditure. If one assumes that the projected fiscal balance is dependent on revenue realisation, then if revenues fall short of the target it is not just the centre’s fiscal consolidation that would go for a toss, the state budgets too would be seriously affected. If we look at Union Finance Minister Pranab Kumar Mukherjee’s budget from the states’ perspective, then three issues become important: (i) fiscal consolidation, (ii) introduction of the goods and services tax (GST), and (iii) the volume of transfers to the states.