14th Finance Commission has taken away the oil cushion to some extent: Arvind Subramanian

Interview with Chief Economic Advisor

Ahead of Budget 2015-16, Chief Economic Advisor Arvind Subramanian says declining crude oil prices has given Finance Minister Arun Jaitley the leeway to meet the Centre's fiscal deficit target for 2015-16. In an interview on Doordarshan, Subramanian tells T N Ninan the 14th Finance Commission's recommendations should be seen in the context of greater fiscal autonomy to states. Edited excerpts:

The 14th Finance Commission's recommendations give a lot of money to states. Yet, other transfers will come down. On a net basis, will states get significant additional transfers or will they be left with the same kind of transfers at the end of the day?

This is a very important point. In the past few days, the commentary on this has been a little confusing. In terms of pure tax devolution, from 32 per cent to 42 per cent, (it is) unprecedented. In terms of non-Plan grant transfers that the Finance Commission does along with tax, the increase is also unprecedented. But people say 'you also have to take into account Plan transfers'. It's true that if you add Plan transfers, it might be less. But I would argue this is not the right way to look at it in terms of fiscal federalism and autonomy.

So, on a net basis, will states get more money or not?

They will get more money.

Significantly more or marginally more?

I think compared to last year, it could be three-four-five percentage points more.

Percentage of GDP (gross domestic product) or percentage of tax revenue?

Percentage of the divisible pool.

You have a figure that seems to suggest one per cent more.

Relative to the average of previous years, it is one and a half per cent but relative to the previous year, three-four per cent more.

For Saturday's Budget, is the finance minister significantly constrained by fiscal transfers or not? You are saying he might be marginally constrained.

You will see all that in Saturday's Budget. Obviously, I can't comment. But the fact is the Centre has to give out more and the question is how much it could plough back. That is a political decision. There will be some impact on the fiscal situation, there is no doubt about that.

Juxtaposed against that is the whole question of oil. In the Survey, there are figures showing net additional tax to the Centre from petrol and diesel will be about Rs 70,000 crore for a full year. And, you have reduction in subsidies. Subsidies on diesel are gone; you have Rs 40,000 crore. You have no subsidies on cooking gas, kerosene, fertilisers, etc. You will be saving over one per cent of GDP from savings on oil prices. Reducing the fiscal deficit next year isn't a task, it is easy.

I think if you do the numbers carefully, the extra freedom the finance minister might get is 0.5-0.6 per cent of GDP. You have to share tax on petrol and diesel with states; the Finance Commission's recommendations will be there. Then, you have to decide about public investment; that is a choice you have to make. It's not an easy balancing act. It's true that oil has given us some cushion, but the 14th Finance Commission takes away that cushion to some extent.