The Indian Finance Ministry’s top economic affairs official pushed back against the suggestion that states are getting less than their fair share of central funds in the new normal of centre-state fund sharing that's been worked into the system against the backdrop of two massive disruptions - Demonetisation and the newly minted Goods and Services Tax - in the span of six months.
In a rare on camera interaction on the nuts and bolts of centre state finances and the backroom work that went into rolling out the Goods and Services Tax, Subhash Chandra Garg, Secretary, Department of Economic Affairs spoke with Firstpost in Washington D.C after the annual IMF meetings. Garg is a 1983 batch Indian Administrative Service officer from the Rajasthan cadre and took over the DEA Secretary role mid-year 2017 after his predecessor Shaktikanta Das retired.
Excerpts from the conversation, lightly edited, are below:
Firstpost: Has the government taken a sledgehammer to crack a walnut - Two massive disruptions in less than six months…?
Subhash Chandra Garg: I don’t know what you’re referring to as a walnut. If India’s tax reform is equal to cracking a walnut, that is not true. So many indirect taxes spread over federal and state governments - each one compartmentalised further into sub categories, the number of cesses… It was a humungous challenge. We neither used a sledgehammer nor was the challenge a walnut. It was the most appropriate system that has been put in place. A manual system being replaced by a totally computerised system…is no mean feat.
FP: The government has succeeded in ensuring that it is impossible to operate outside the ambit of regulatory framework. What are you doing to ensure that business can operate efficiently inside the new system?
Garg: That is the case. That’s what you see now. The better prepared part of the industry, which you hear about often from the Finance Minister - 95 per cent of the taxes being paid by 400,000 assessees in the indirect tax space. They have taken to the new system very well. We had some issues with the smaller portions who have had some difficulty adapting. The government has been very responsive so that the new system is friendly.
FP: The increased transparency has led to a decline in bank finance to industry - especially steel and infrastructure….
Garg: The decline is not because of any of these (new) measures - demonetisation or GST. The decline is because of the larger investment decisions made by them. Overcapacity led to some stresses, pricing power got reduced. Those will also be addressed. But if the industry in these sectors cannot improve, then they can resolve through the IBC process. The banks did finance these sectors.
FP: There’s a surge of references to Jan Dhan accounts. Meanwhile, Universal Basic Income has figured in the IMF annual report too. What’s the thinking within government on next steps?
Garg: It is very clear. The Government’s stated policy is to take all the transfers the government does - of subsidy and support - and it should go through these accounts. And these accounts will gradually be embedded with many more facilities.
FP: In the aggregate, you are saying the fisc is doing well. Govt also claims that every Rs 2 cut in excise leads to a Rs 26,000 crore reduction in income to the exchequer. But specific duties are a multiple of that ( of the Rs 2 cut), so if the fisc is indeed doing well on account of the increase in specific duties which have risen from almost nothing, then why are states getting less than their share of 49% of funds ( as recommended by the 14th Finance Commission)?
Garg: Again, this needs to be seen in the right context. Most states are rightly demanding…as I said, I’m from the state of Rajasthan..we demanded much of the central share should come in the untied way. It should not be tied to any particular programme. That is what was done - by increasing the share (of states) from 32% to 42%. This kind of enormous increase is unprecedented. So 42% of the center’s taxes are shared with the states without any conditions. This is the way the states should get (funds) and they can in turn plan what they want to use that for. What you refer to as 49% is the other kind of support which goes from the Centre in the form of plans, schemes. That’s not a great kind of support….Most states you would find complaining that if you send it in tied form, their ability to determine expenditures get reduced. Let us take any scheme of Government of India, let’s say 50-50. Fifty percent the government would give but 50% would be provided by the states…The right way to progress is through untied funding. Earlier we used to have a lot of loan based schemes where the loan was paid by the Government of India to the states. That also amounted to the Centre determining where they ( states) should spend but they were getting indebted. That has been transformed. Planned funding is not in the form of loans. These are changes that have made state finance more robust, not worse off.
Updated Date: Oct 17, 2017 16:39 PM