Reading the Tea Leaves
The Finance Commission's orders have led to a rise in the states' share of the Centre's revenue from 31 per cent in 2014/15 to 41 per cent in the 2016/17 Budget.
On Independence Day 2014, the Prime Minister scaled the ramparts of the Red Fort and spoke to the assembled school children. He told them that the Planning Commission was like a decrepit old house that would cost too much to repair, and that it would be replaced with a new institution having a new design and structure, a new body, a new soul, a new thinking and a new direction. It was abolished on February 15, 2015, as he promised. The Budget that followed a fortnight later was, perhaps, too early to implement his decision. But the 2016 Budget continues in the old mould; even the allocation of expenditure to the plan has changed little. On this serious 'reform' the PM promised, the Finance Minister has not moved an inch in a year and a half.
The Finance Commission's orders have led to a rise in the states' share of the Centre's revenue from 31 per cent in 2014/15 to 41 per cent in the 2016/17 Budget. The Finance Minister has been feeling the pinch. He cannot raise income or corporation taxes without upsetting important patrons; so he has raised money from them surreptitiously by means of cesses and surcharges. They came to 5 per cent of direct taxes in 2014/15; in the current budget, they have risen to 11 per cent. India's international trade has been falling, and he cannot raise customs duties without breaching international obligations. So he has been raising the reach of Central excise; its share in Central revenue has gone up from 17 to 23 per cent between those two budgets. He has also cut down on assistance to states and union territories; their share in total expenditure has gone down from 31 to 24 per cent of total expenditure. The share of subsidies has fallen from 16 to 13 per cent. The money saved has gone to the Central plan, whose share has gone up from 12 to 16 per cent - not much, but the Centre is gaining some independence at last.
Taking a longer view, the Central government expenditure almost doubled from Rs 1.02 to Rs 1.97 trillion between the 2008/09 (actual) and 2016/17 budgets. The share of interest payments went up from 21 to 25 per cent of total expenditure, the share of grants to states and union territories from 4.6 to 12 per cent, the share of pensions from 5.6 to 6.2 per cent, and the share of police from 2.6 to 3 per cent. The UPA government was a passionate over-spender and borrower; the NDA government, whether it sticks to its plan of controlling the fiscal deficit or not, is less devoted to improvidence. The Centre has been buying the goodwill of state governments by giving them all kinds of discretionary grants. The enormous transfers ordered by the last commission have reduced the capacity of the Centre to continue to do so, so it is possible that the NDA government will be more restrained. Pension expenses have been rising as government employees go on living longer after retirement.
States with law-and-order problems have repeatedly asked the Centre for help, so it has been beefing up its non-military security forces. On the other hand, the share of the armed forces fell from 14 to 12.5 per cent, and the share of subsidies from 14 to 12.5 per cent (the similarity of the figures is entirely accidental). The absence of any serious threat from outside has reduced the power of the army to draw on resources. The fall in the share of subsidies is partly due to the recent fall in oil product prices, and the glut in procured food grains which the current government has used to pare food subsidies. It has also been less generous with MGNREGA. These two were the biggest corruption programmes of the previous government; may they continue to shrink under the present government!
The writer is a senior economist and former chief economic adviser, Ministry of Finance