The Fifteenth Finance Commission (FFC) is finalizing its recommendations for the sharing of resources between the Centre and the states. Ahead of the release of the recommendations, FFC chairman N.K Singh spoke to Mint candidly and shared his views on the challenges the panel faced and the broad contours of their proposals. Edited excerpts:
How have your recommendations been influenced in such a tumultuous year?
I have already given a report for one year, 2020-21, in the context of the economic slowdown at that time, because you know even before Covid-19, if you look at the figures around October of last year, when we gave the report we factored in that we wanted to look to better growth prospects. To some extent, for 2020-21, whatever we wanted to give, we have given to the President, the government accepted it and placed before Parliament. We are now expected to give a report for the period that begins 2021-22. The first challenge is to assess the impact of the pandemic on the work of the commission. Clearly, there is huge uncertainty and huge vulnerabilities. Uncertainty in the sense that we do not know the path of the pandemic. The fiscal pressures in dealing with issues of livelihood is a totally new factor the commission has had to deal with.
How else have the circumstances of this Finance Commission been exceptional?
There are the two other distinguishing characteristics of this volatile period. Unlike other Finance Commissions, which made one gross domestic product (GDP) growth assumption throughout the award period, we did not have that opportunity. Also, we could not project a uniform growth figure for the Centre and the states. We have had to distinguish between fast growing and slow growing states. The dynamics are complex. We recognize that from a low base of this year, there is bound to be sharp recovery next year. However, that could mechanically arise from the low base. Then there is the issue of reckoning the extra expenditure of the central and state governments. This can be done in part by expenditure reprioritization. The pandemic has exposed the vulnerabilities of the health system and both the Centre and the states have to reprioritize their expenditure. We are a unique FC during a pandemic.
After goods and services tax (GST) compensation period is over in June 2022 and states have limited scope for raising revenues, do you think states may require a higher share of total divisible pool of revenues than the current 41%?
From 2022 onwards, we have projected a rate of growth for the central government as well as state governments. I fully applaud the central government in reiterating the fact that they are not rescinding the liability of the 14% (protected GST revenue growth). I recognize that the period of cess will continue beyond such time as this liability is not extinguished. I, therefore, assume that this amount, which may be necessary, would be coterminous with my award period. This will imply, if that is so, to some extent, depending on how the economy behaves and the GST compensation cess behaves, a (fiscal) cliff can be avoided. I am also putting great emphasis on deepening of structural reforms, many of which have been announced and many of which are in the offing. I reckon that the far reaching reforms in agriculture will be further deepened. We ourselves are proposing some initiatives regarding the agriculture sector. I assume that on power and infrastructure sectors, many important reforms have commenced.
Are you saying that structural reforms will continue and you see an economic multiplier because of them?
We expect it and we strongly suggest continuation and deepening of structural reforms. Yes, (we see a) multiplier effect from structural reforms, revenue reforms and expenditure reprioritization. As part of our response to the pandemic, for the first time one of the chapters of our report deals with health. We have recognized that the public outlay on health currently is less than 1% (of GDP) including 0.6% by states and 0.3% by the Centre. The pandemic has showed up the historic neglect of the health sector, particularly when the Planning Commission existed. We will endorse the 2017 health policy which talks about 2.5% (of GDP) to be devoted to the health sector. We have focused quite a bit on reprioritization of expenditure in terms of strengthening the primary health centres, infectious diseases, testing laboratories and some of the important areas.
