Finance Commission has sought to balance variables of need, efficiency and equity: N K Singh

15th Finance Commission chairman NK Singh (Abhijit Bhatlekar/Mint)

NEW DELHI : Finance minister Nirmala Sitharaman tabled the interim report of the 15th Finance Commission (FFC) for 2020-21 in Parliament on 1 February after incorporating its recommendations in her second budget. While the FFC addressed many of the references made to it by the Centre, it sidestepped some contentious issues such as the proposal of a defence and internal security fund to be taken care of in its final report to be submitted in October.

In an interview, FFC chairman N.K. Singh delves into various facets of the commission’s recommendations. Edited excerpts:

How did you strike a fine balance between the hungry states on one side and the starving centre on the other side?

As implied in the terms of reference, every Finance Commission (FC) has a degree of continuity drawn from the constitution itself, yet every FC has its own unique Terms of Reference (ToR). So, the challenge of addressing these wide-ranging ToR keeps changing. This FC had four important challenges. First, a ToR which was very broad-ranging. They had listed a whole lot of monitorable performance criteria, prompting us to rethink in many ways. This raises many issues like the nature of central sector projects and centrally sponsored schemes on which the central government spends over 3 trillion per annum.

Second important challenge was the fact that the full impact of the Goods and Services Tax (GST) was really faced by this Commission in two ways. It impacts the entire revenue of the central government and performance of GST represented a unique challenge in accessing in the entire area of its finances. Also, by its very nature, GST impacts not only the revenues of the states, but by its subsumed sovereignty of economic decision making, states say that the flexibility left to their revenues is very limited.

Third, is the inevitable one, of absence of the Planning Commission and abolition of the distinction between Plan and non-Plan expenditure.

The final challenge of course was that on account of structural changes which have taken place, the macro-variables looked different and one would have to make different kinds of assumptions.

In this framework, when it came to the partition between vertical and horizontal devolution, no FC in the past has lowered the devolution to the states. We didn’t want to tamper with continuity and legacy. The adjustment to 41% is a result of modeling for 28 and not 29 states. The Commission sought to balance variables of need, efficiency and equity.

You have used Total Fertility Rate (TFR) in the population math. Does that mean you have addressed the fears of the Southern states?

Let me put it this way that we have sought to address the fears of being at the receiving end. Whether we have dispelled their concerns is for them to assess. But there are other concerns. States like Karnataka, Kerala and Telangana whose per capita GDP is significantly higher than the national average, are not particularly attaching weightage to the income distance variable. But what the Commission could do is reduce the weightage of income distance from 50% to 45%, there is nothing more we can do. We address a direct concern on the use of the Census data of 2011 versus 1971. Finance Commissions are not the primary deciders on what Census we will use, it is determined by the President in the ToR itself. This time, they decided if we use population as criteria, it will be Census 2011.

For previous FCs, the wording was such that it allowed them room for maneuver between Census figures. This time the wording of the ToR was more categorical and did not allow a play of the use of Census data. Many states which have achieved improvement in demographic management in TFR, investment in girl child education, health parameters felt that if 2011 data was to be used, they would be penalized on their score. So, equity performance and needs are the three things with which we wanted to balance. Since we were using the 2011 data, we decided to reduce the weightage of population to 15%, but for some way recognizing performance and efficiency, we introduced a new criteria called demographic management with 12.5% weightage, by using the 1971 data and tracking the improvement till 2011.

So, the two criteria taken together came to 27.5% which is exactly the same number which was used by the 14th FC, but we did it in a different way by directly recognizing the need to reward improvements made in population control.

You have assumed nominal GDP growth of 10% for FY20 and 11% for FY21, while the National Statistical Office now says it will be 7.5% in FY20 and Budget pegs it at 10% for FY21. In hindsight, do you think this information would have impacted your allocations and recommendations?

One always becomes wiser in hindsight, that’s a reality particularly for those who do economic modeling. There was an option of choosing an excessively conservative data which would have also involved suppressing states very significantly because while we have assumed growth rates in the states which historically have been just behind the growth rate of the centre. So, if I had that information at that particular point of time, it is difficult in the hindsight to say how would the Commission have reacted. But the fact remains that uncertainty surrounding the key macro-economic variables prompted the Commission not to make five-year projections.

Is the reduction in the states’ share in the divisible pool to 41% from 42% a permanent feature or will it be restored if J&K regains statehood as promised by the central government?

This Commission is in no position to second guess the decision on the nature whether J&K continues as a UT or becomes a full state, we would not like to enter this area of second guessing. If by the time we give the report, the status changes we will factor that, if it remains the same, we will factor that. Right now we have modeled for 28 states, not 29 states which has been the past practice.

As you pointed out that no past FC has reduced the share of states, are you clearly signaling that you are not going to substantially reduce the share of states in your final report?

I have not frozen anything. That is one statement which is a factual statement that in the past it has not happened. As we have written in the report, given the uncertainties of some key macro areas, our recommendations in final report would undergo changes and adjustments as appropriate in the light of subsequent data and analysis. Suppose for instance, the fiscal space shrinks or increases very dramatically, that certainly influences what you do with respect of the key variables whose costs are being borne by the central government. So the FC’s recommendations must be taken in its entirety and not disaggregated into components.

While the FFC has proposed 74,000 crore as post devolution revenue deficit grants for states, the government in the Budget has allocated only 30,000 crore.

That is between the states and the Ministry of Finance because as far as we are concerned, we have made this recommendation and the explanatory memorandum approved by the finance minister says it has been accepted.

The finance ministry has not accepted the recommendations of FFC regarding special grants and nutritional grants. Do you agree with the objection cited?

On nutritional grants, it’s not that they have not accepted. They have substantially enhanced the budgetary allocation for Poshan scheme. On special grants, there is a fair point that it is introducing a new principle. We will consider it in our final report.

It’s a union government decision, but as the chairman of the FFC how do you see the suggestion that the FC should be made a permanent entity given the stage of development in India at this point of time.

It would be exceedingly naïve for a sitting chairman to talk about his continuation. Self-perpetuation is an inherent bias embedded in human nature. But yes, previous several Commissions in their reports have talked about some measure of continuity in one form or the other.