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Putting more money in the hands of the poor who have a high propensity to consume should be the aim of our fiscal policy.

Abhijit Banerjee Esther Duflo and Michael Kremer have just been awarded the 2019 economics Nobel for their work on combating poverty. Banerjee Raghuram Rajan and others have also underlined the seriousness of the growth slowdown in India. There could be no better time to argue the case for an inclusive strategy to revive growth. 

From a peak of 8.1% in the fourth quarter of 2017-18 growth in gross domestic product (GDP) has now decelerated to a six-year low of 5% in the fiscal first quarter with a slowdown visible across all sectors. Particularly important in this context is the compression of government expenditure. Central government revenue grew only 6% last year more than 11% short of the budget estimate. Accordingly expenditure growth was compressed to 6.9% last year down from more than 11% the year before. Weak revenue growth meant devolution to states also fell short forcing them to cut expenditure. This compression of government spending at a time when all major components of aggregate demand were already slowing has been an important driver of the sharp decline in economic growth. 

We now require a macroeconomic strategy to revive aggregate demand in the short-run while initiating structural reforms to sustain growth over the long-term. Given the grim global economic environment reliance will have to be placed on internal sources to generate demand. The measures the government has announced are largely in response to demands of specific interest groups such as foreign portfolio investors real estate companies automobile companies etc. These have mostly been piecemeal supply-side interventions which may help these specific interest groups but won’t reverse the collapse in aggregate demand. 

The Reserve Bank of India (RBI) has repeatedly cut the repo rate to revive demand and has also taken other measures to ease the availability of credit. However in real terms the policy rate is still rising and these steps have amounted to pushing on a loose string because the binding constraint on credit flow appears to lie elsewhere—in the lack of credit demand in some segments and credit exposure limits in others. With limited traction for monetary policy the burden of growth stimulation must fall mostly on fiscal policy. Here the unrealistic assumptions of the 2019-20 budget are quite worrying. It has been assumed that tax revenue and total revenue will grow by 25.3% and 25.6% respectively though they both grew by only 8.9% in 2018-19. The expenditure targets are equally unrealistic. Hence there will be another large revenue shortfall and corresponding expenditure shock this year further reducing growth. 

Clearly the 2019-20 budget will have to be substantially revised in the winter session of Parliament or earlier to arrest the crisis. In fact tax policy has already been revised after the budget with a large reduction in corporate tax rates. These are likely to have a strong positive impact on growth in the medium- to long-term. In the short-term though they will exacerbate the revenue shortfall as the government itself has pointed out. In comparison the impact of an increase in government spending would be direct and fast especially if it puts more money in the hands of poor consumers who have a high propensity to consume. That would have a strong multiplier effect and this should be the guiding principle for an inclusive fiscal strategy to revive growth. 

However such spending cannot be financed through more borrowing. The total public sector borrowing requirement for the Centre states and public enterprises amounts to over 9% of GDP while household financial savings amount to only 7% of GDP. With such severe crowding out the deficit needs to be shrunk not increased. So what should be done?

Extraordinary conditions call for extraordinary measures. Deep fiscal reforms could create enough fiscal space to substantially increase pro-poor spending and revive growth while reducing the fiscal deficit; all this without raising tax rates. If this sounds too good to be true here is the arithmetic. The revenue shortfall in 2018-19 was mainly on account of a leaky goods and services tax administration based on an incomplete electronic information system—the Goods and Services Tax Network (GSTN). Further the 2019-20 receipts budget shows the government is foregoing revenue to the tune of 5% of GDP on account of tax concessions and exemptions whose public benefit is unclear. Another 5% of GDP is typically spent on non-merit subsidies. Further the Comptroller and Auditor General has estimated that savings due to excess appropriations amount to 1.5% of GDP. Fixing the GSTN on a war footing paring down tax exemptions and rationalizing subsidies can free up fiscal space to the tune of 6-7% of GDP. 

This can be used to finance an inclusive growth revival strategy with three components. First building on the PM-Kisan programme Maitreesh Ghatak and Karthik Muralidharan in a paper An Inclusive Growth Dividend: Reframing The Role Of Income Transfers In India’s Anti-Poverty Strategy have made a compelling case for extending the ₹6000 income support per farmer to all citizens which would cost 1% of GDP. This income support could be increased to ₹12000 per citizen per year doubling the cost to 2% of GDP. This support could grow with the economy.

Second education health and infrastructure are all underfunded. Additional funding of 1% of GDP could be provided to each of these. Lastly the remaining fiscal space could be used to cut the fiscal deficit.

Sudipto Mundle is a Distinguished Fellow at the National Council of Applied Economic Research 

Breaking away from the age-old tradition of immersing idols in rivers such as Yamuna this year set a new trend in Delhi. Following the directive of the National Green Tribunal-appointed committee idol immersion in the Yamuna this Dussehra was largely avoided albeit reluctantly by the ritual loving public. Instead the idols were immersed in artificially created ponds/ pits at various pre-designated locations.

The logic behind this move is that idol immersion adds to pollution of river water as heavy metals used in idol decoration and colouring are harmful for various aquatic species. Moreover it is argued that if the same polluted river water is used for irrigating the vegetables cultivated on Yamuna’s flood plains heavy metals could well enter our food chain. Now that would be double jeopardy which naturally called for action.

Deliverance seemed to come for Delhiites in the form of the NGT diktat widely lauded as an innovative solution which helped the devout retain their ritual without polluting the rivers. So one could well conclude that with this move religion and policy happily co-exist and all is well for citizens of Delhi.

Now it would be interesting to see how this solution offered by NGT holds up if one were to introduce logic into this mix. It is well known that alternate water bodies have been temporarily created and no efforts made to ensure that the harmful chemicals released from the idols after immersion do not percolate underground. By the same logic one could infer that this too could have larger more serious implications.  Instead of water pollution affecting the river Yamuna ground water of entire Delhi may become contaminated! 

Moreover decentralisation of idol immersion to multiple water bodies necessitates redoubling of efforts to monitor ground pollution level post immersion days which is manpower intensive.  But do we have the requisite resources for this? The answer is evidently no. Consequently there is a distinct possibility that ground water pollution may rise.

If one were to take a holistic view Yamuna is almost a dead river year-round regardless of idol immersion. If polluting factors for Yamuna were to be measured in a year the share of idol immersion would hardly amount to 5%. Discharge by untreated sewerage and industrial effluents are the primary cause for the river’s sorry state in Delhi. It is estimated that 130 mgd of untreated effluent sewage flows into the Yamuna at present including three major drains which carry more than 70% of NCR’s raw sewage into its main water body.  For this reason even during monsoons the quality of water in the Yamuna is still unsuitable for bathing or drinking.

Inadequate waste management poor implementation of environmental regulation and unregulated construction on the flood plains are the principal issues plaguing the Yamuna. Despite this alarming scenario for 340 days of the year we remain apathetic when untreated sewerage or construction material continues to be dumped into the Yamuna. Only for 20 days during idol immersion our eco-consciousness comes to the fore and intellectual discourses abound on how to avoid polluting the river. 

A somewhat centralised approach is advocated for monitoring the pollutant load due to immersion which is next to impossible in the decentralised model. For instance consider the approach that Kolkata Municipal Corporation has been following. Most of the decorative items including flowers etc. are not dumped in the river but put in a vat placed for that purpose. The idols are immersed in a captive area of the river and cranes then move in to take away the idol debris thereby minimising the pollutant load. This is certainly an approach worth emulating.

So before a potent brew of heavy metals and toxic ingredients percolates Delhi’s ground water table let us adopt sensible measures and proven practices to stop this insidious problem from becoming a full blown crisis. Our gods and goddesses too will be pleased!

Sanjib Pohit is Professor at NCAER. The views expressed are personal

On 29 July 2019 the government amended and added to the terms of reference (TOR) of the 15th Finance Commission (15th FC) asking it to “… examine whether a separate mechanism for funding of defence and internal security ought to be set up…” The amendment has been interpreted as an attempt by the Centre to encroach on the fiscal autonomy of states and pre-empt a part of states’ resources to fund defence and internal security. There is a wider political and economic context that accounts for this interpretation.

The political context is the conversion of the Jammu and Kashmir state into three Union territories by the stroke of a pen along with the abrogation of Article 370. Opposition parties and others claim that amendment of the 15th FC TOR is part of a larger campaign to undermine the federal character of the Constitution. The economic context is the sharp deceleration of growth and large shortfall in revenue which are driving each other. Central revenue is projected to grow 25.6% in 2019-20 compared to the 8.9% rise in 2018-19. The expenditure projections are equally unrealistic. The Central government is well aware that another major expenditure shortfall in 2019-20 will further reduce growth which had decelerated to 5% by the first quarter of 2019-20. The Central government is therefore scrambling for resources. It is against this background that the 15th FC TOR amendment is being seen as an attempt to preempt some resources of the states for funding defence and internal security.

Will the TOR amendment indeed encroach the fiscal space of the states and if so what should be done to preserve their fiscal autonomy? To address these questions it has to be noted that nearly two-thirds of the shareable pool of tax revenue is usually transferred to the states. In the 14th FC award period this was set at 63% with the balance 37% being the Centre’s share. But in addition the Centre also receives cesses and surcharges and the dividends and profits of central public enterprises and public sector financial institutions like banks and the Reserve Bank of India. In setting the Centre’s share at 37% of the shareable pool the 14th FC had also factored in the Centre’s access to these non-shareable revenues as well as its expenditure needs including the provision for defence and internal security. This is standard practice for all finance commissions. 

If the 15th FC recommends that a certain portion of the shareable pool should be separately carved out for defence and internal security then the requirements of the Centre net of defence and internal security will have to be adjusted downwards. The 15th FC cannot obviously double-count the provision for defence and internal security both before and after devolution. Hence the carve-out need not necessarily erode the fiscal space of states. However while defence is a Central subject internal security is the joint responsibility of the Centre and states. This would imply that the provision for internal security would be carved out in advance from what would otherwise have been states’ resources but without their approval. So what would be eroded is not so much the fiscal space of states but their fiscal autonomy. 

There is a similar erosion of fiscal autonomy with Centrally Sponsored Schemes (CSS) the largest component of non-FC transfers to the states. CSS schemes are funded on a cost sharing basis hence they pre-empt a large share of the states’ expenditure. Moreover unlike FC transfers which explicitly balance considerations of equity and efficiency CSS allocations are entirely ad hoc decisions of Central ministries favouring some states at the cost of others. 

These issues call for reform of the overall architecture of fiscal federalism. Three possible options can be considered each requiring a constitutional amendment.

One option is to only allow transfers through untied tax devolution. This option is unrealistic for several reasons. First there may be externalities effects that spillover beyond state boundaries or issues of national importance such as food security which cannot be left entirely to states. Further strong states may have the resources and capacity to design finance and manage schemes on their own but the weaker ones may not. Finally given the long legacy of CSS it is difficult to imagine that any central government would completely walk away from CSS especially those that are popular and have considerable political mileage. 

A second option is to make the FC a permanent body and expand its mandate to undertake the resource allocator role of the erstwhile Planning Commission. However this option would not preserve the fiscal autonomy of states since the FC would decide what programs or projects should be allocated to which states. 

A third option my preferred option is to revive the Inter-States Council as an effective federal decision making body. It already exists as a constitutional body but has been left dormant. It can be restructured as a federal institution outside the home ministry a Council with state chief ministers as members and chaired by the prime minister. The Council should be supported by a secretariat of experts to design programmes and lay put the principles for their allocation among the states. 

Sudipto Mundle is a Distinguished Fellow at the National Council of Applied Economic Research