Schemes like PM Kisan, NYAY should better be left to states, says Y V Reddy

Fiscal risk is more if PM Kisan and NYAY schemes are at the Centre, because it does not have hard budget constraints

Y V Reddy, former RBI governor and chairman of the 14th finance commission, tells Ishan Bakshi & Indivjal Dhasmana that states have been asked to do more on fiscal consolidation but the problem lies with the Centre. Reddy was in Delhi to launch his book Indian Fiscal Federalism that he co-authored with G R Reddy, advisor (finance) to the Telangana government. Edited excerpts:

The N K Singh panel talked about FRBM Act amendments. You also talked about public debt in your book. It seems if you are to reduce debt-GDP ratio, the burden falls squarely on the Centre. That would require massive adjustments. Do you think it is possible to reduce the ratio in five years?

If you see the path suggested by the N K Singh panel, it is unequal. While the problem is significantly with the Centre, the states have been asked to do more fiscal consolidation than they need to. That is somewhat asymmetrical. 

How do you see PM Kisan and NYAY in this context? Do you think these are feasible? How will these impact the Centre’s fiscal consolidation?

Fiscal risk is more if these schemes are at the Centre, because it does not have hard budget constraints. The Centre already has fiscal problems. States have hard budget constraints. States have to account these schemes within budget limits prescribed by the Centre. 

Also, these schemes require local understanding. Do you consider a farmer in Nagaland same as one in Madya Pradesh or Kerala. The whole information is with the states. Administration has to be done by the states. Naturally, the responsibility has to be with the states. So, both in terms of comparative advantage as well as fiscal risks, these should be with the states. As Central schemes, these are less logical and more fiscally risky. I am not making any judgement on whether these schemes are good or bad. 

But there have been farmer suicides in some states… Even then do you think the Centre should not intervene?

The Centre can ask states as to why are they not intervening. If there are suicides and there is an alarming situation, don't you think the people will decide the fate of that state? There is an elected assembly. There is the Constitution. It is not that all states are failing in all the subjects. The Centre can encourage or discourage the states from doing a particular scheme. But the Centre should not substitute the states in the schemes which are state subjects.

Recently RBI governor Shaktikanta Das suggested that the finance commission should be made a permanent body. What is your view?

This matter was examined by the Sarkaria commission, which said commissions should not be made permanent. Others also examined the issue. The 14th finance commission had also recommended that there should be two separate institutions. A finance commission, which should be (set up) once in five years, and another a continuous body like planning commission, which will take care of non-finance commission transfers. Predominant opinions so far have been against making finance commission a permanent body. 

What is your view on shifting the population reference to 2011 from 1971 as mentioned in the terms of reference for the 15th finance commission? 

The 14th finance commission had mentioned clearly that each commission has to take into account the population for the period for which the award is. You cannot take an outdated population and say I will treat that as the basis for accessing the needs of tomorrow. Using 2011 as the reference is better than using 1971. But ideally, one should ask the registrar general of census to provide population estimates for 2022. 

The 14th finance commission increased states’ share in the divisible tax pool to 42 per cent from 32 per cent. But a recent study suggests that for some states, the burden to fund centrally-sponsored schemes exceeds an increase in tax revenue sharing…

First of all, 32 per cent and 42 per cent is not comparable. There has been some move on the design of centrally-sponsored schemes and some on cesses and surcharges. The net result is that aggregate transfers from the Centre to states, as a percentage of gross tax revenues of the Centre, remain same or marginally lower. So, it’s not true if you say the Centre is having a crunch in terms of resources. It has a crunch in terms of discretion. 

Over the years, the share of cesses and surcharges in the Centre’s gross tax revenue has surged. Some argue this subverts the spirit of cooperative federalism. What are your views? 

Cesses and surcharges levied on subjects, which are essentially on the state list, is certainly an erosion of the states’ fiscal space. Ideally, there should be a national consensus on cess and surcharge. In fact, the Comptroller and Auditor General of India has raised questions over the utilisation of cess funds. 

Some fear that the terms of reference of the 15th finance commission suggest a move towards greater centralisation…

That’s what the complaint of the chief ministers is and we should be able to explain to them. 

There is also a reference to populist schemes.... 

The full analysis is there in the book. The most important thing is that is it good to have conditional grants? Do chief ministers have confidence that they work? The problem with grants from the finance commission is it comes once in five years. There is no continuity. Second, it comes and goes. In between, it is administered by the Union government. Much depends on how it is administered. Also the effectiveness of grants is circumspect.

On NITI Aayog you seem to be expressing concern over how it has conducted its business?

It's not so. A chapter on NITI Aayog has been virtually taken from its annual reports.