FRBM review panel chief says will also look at state finances

"We will certainly be consulting with states," Singh told CNBC-TV18. "State governments feel that while the Centre has a lot of flexibility, they have been straight-jacketed. States have been complaining about lack of funds despite the increased devolution."Below is the transcript of N K Singh’s interview with Shereen Bhan on CNBC-TV18.Q: I do not want to get you to pre-judge this issue, because I know that this is a matter that is now being deliberated on by the committee that you head. You have until October 31 to present your recommendation. So, I am going to ask you this purely in an academic realm because these are concerns and issue that have been raised with the fiscal responsibility and budget management (FRBM). Let me ask you about the meeting that was held over the weekend. That was the first meeting of the FRBM panel. Was that essentially to sort of suss out the terms of reference that the government has given you?A: It was a preliminary meeting where we wanted to discuss the roadmap, the contours, the procedures of work. It was largely a housekeeping kind of activity which is to be expected in the first meeting. But we did go into some of the issues which are in public domain. So, there is no great secret the debate which has raged not only in India, the debate has been raged all over the world. And also, who are the kind of people with whom consultation should be taken. This is the issue on which there are a large number of stakeholders, not this smallest of which are state governments because state governments are very keenly watching what are the kind or rules of the game that the central government prescribes for itself and whether the same would be applicable to them or not.Q: Absolutely, In fact on that point you pre empted my next question, because the former Deputy Chairperson of the Planning Commission, Montek Singh Ahluwalia in a piece that he wrote on the need to overhaul the FRBM had said that the FRBM Act succeeded in disciplining states, because states cannot borrow without the centre’s permission. But it was spectacularly ineffective in disciplining the centre. Would you agree?A: I do not know whether it was spectacular or not, but Montek was very much a party to whatever was done. So, for the ten years in which he headed the Planning Commission, the part of the culpability really rests also on the doorsteps not of his personally, but the time for instance, when Mr P Chidambaram pressed the pause button in wanting to augment gross budgetary support of the government to support expenditure and that Vijay Kelkar did – second Kelkar two, so to say – Kelkar one was largely the implementation on mechanism for the FRBM Act that the parliament had enacted, but Kelkar two was to revise the roadmap which was prescribed in Kelkar one. So, if the central government brought more flexibility with itself, that they were very much a partner with it and that it is true, however, that state governments really felt that while the central government has brought flexibility, the states have been straitjacketed. Q: Since we are talking about states, let me ask you this in the context of what has been recommended by the 14th Finance Commission as well and what that would then mean in the context of the new FRBM, so to speak. How do you apportion what the centre bears, what the state bears, also keeping in mind the combined fiscal deficit?A: One of the terms of reference of this FRBM committee, if you look at the terms of reference, it is talking of the finances of the government as a whole which means it the union and the states. Without specifically referring to the states, it does imply that the implications in respect of states need to be factored in any recommendations which are made and to some extent, yes, you are right that the rules of the game and the overall milieu has been dramatically altered by the recommendations of the 14th finance commission. Not only in terms of the much larger devolution to 10 percent higher devolution – from 32 percent to 42 percent is a very large number in absolute terms. But what happens to really the central support mechanisms, for centrally sponsored schemes, for many activities which are exceedingly important. It is quite curious that many states have really brought it to the Prime Minister’s notice, that they do not have money to, for instance, do the Sarva Shiksha Abhiyan, on health issues and some of these issues which is curious, because they have got a significantly higher devolution in absolute terms and that you cannot have really both. You cannot have a much higher devolution and still wanting to depend. But anyway, the fact remains that we have traversed a big distance from the time when state governments were really seeking the Reserve Bank support for overdrafts. From there this particular thing of imposing fiscal deficit constraints and fiscal constraints and moving towards fiscal rectitude by the states have something repaired the states’ finances very significantly.But how much of borrowing they can do for supporting that infrastructure from out of the internal resources because do not forget that in addition to this, the state governments also have public sector under takings many of which are run very inefficiently. Particularly in respect of the power sector, the efforts of the power minister, Mr Goyal at repairing the finances of the power sector of the states has been a significant and a quantum shift in the way in which the power sector finances are being managed. But these all need to be factored that how is the states borrowing needs to be accommodated along with a degree of fiscal discipline which would be consistent with the overall framework and that therefore, the central and the state governments need to act in tandem and in harmony. Q: So, the states will be large stakeholders as part of the consultation process when your committee sits and deliberates on these.A: By all means. We certainly will be consulting the states. They are an important stakeholder in any of these conclusions or recommendations which you want to make and we will certainly be consulting them state government in a significant way – there is no doubt that their views really be given. After all it is this government’s one of high priority to move over to both cooperative and comparative federalism and that the prime minister keeps one of his big mantra is “Team India” and you cannot have a “Team India” without the states being part of the “Team India”.Q: The Finance Minister publically stated in his Budget speech as well that should there be a prescribed number for the fiscal deficit does it constrain the government or does the government need a little degree of flexibility specially given the volatile and dynamic times that we live in. What would you suggest?A: I haven't applied my mind on this issue in terms of what the committee's deliberations are going to be whether you need to have a number or range or a set of numbers. But the fact remains that ever since this act was enacted the global contours have changed very dramatically. For instance one of the principle entities which has always stood for very tight fiscal policies has been the International Monetary Fund (IMF). IMF is consciously moving towards an accommodative fiscal policy.Look at what is happening to interest rates. Countries far from quantitative easing (QE) are now going into negative interest rates. You are talking in terms of helicopter money. You are talking in terms of large number of countries which are suffering consequences of aging population where demand and consumption needs are not a high priority. But the rules of the game which needs to be now seen is in the light of the fundamental changes on the whole global contour in which number of new issues have come up ever since this act was initially crafted. Those certainly would be factored which would deserve the committees consideration.Q: So, beyond the global factors that the committee will need to look into what about the domestic factors and one of the big issues that continue to weigh on the economy and continues to weigh on the public finances of course is the subsidy mechanism, is the need for greater subsidy overhaul. How much of that is going to be something that the committee is going to look into because given our tax to gross domestic product (GDP) ratio the tendencies so far really has been to cut down on capital expenditure and that has really been a way to achieve the fiscal deficit number. So, how much of a subsidy overhaul is going to be or improving the tax to GDP ratio is going to be something that the committee looks at?A: Let me say that two or three very quick comments that will be brief. First this government has done some fundamental changes in the administration of the subsidy. The increasing use of the Aadhaar and the use of technology platform, moving towards direct benefit taxes in terms of cash transfer, using mobile telephony for purposes of making the beneficiaries genuinely benefit is a very fundamental but the Prime Minister has mentioned about the enormous sums of money which have been saved on account of for instance the misuse of kerosene being minimised, on the way in which petroleum subsidies are going to be administered, the changes in the fertiliser subsidy regime in a very significant way. So, subsidy rationalisation has been a notable success of this government in the last two years and improving the quality of governance in that regard. Having said this, the problems which beset the Indian economy in terms of the fiscal theme must be seen in the broader concept. Poverty continues to remain very high.More than that, that one factor which really must be factored is that growth has not translated into employment opportunities. You have had 10 years of the previous UPA government, a decade of jobless growth which is now well known and so we need to not only focus on GDP numbers we need to focus on gainful employment opportunities. The bulk of these employment opportunities is in the informal sector. Methodology for the computation of employment data and the wide variations for the employment co-efficient inter-sectoral employment coefficient really makes policy prognosis more complex but certainly we cannot look at growth without looking at employment. Credit numbers continues to dog us, the credit off tick continues to be very low. This is one of the unusual features of our growth trajectory, but the more important thing is to certainly focus on quality of public intervention, quality of public expenditure into areas where gainful employment opportunities can be created because that is one of our principle problem that we need to create 12 million jobs a year, we need to for instance take care of the backlog of the employment and the focus of policy in my view must be increasingly becoming employment dominated.Q: You are absolutely right. While we talk a lot about this 12 million jobs that needs to be added, so on and so forth we actually haven't seen much work towards that. But in terms of mobilisation of higher taxes now compliance is one issue and the government is trying to do its bit on that front but any other innovative ideas to your mind that we could look at it in this point in time? Of course goods and services tax (GST) is still something that we are waiting for.A: GST is definitely - as you have said it - is going to be a game changer. Even the most conservative estimates suggests that once that begins to get implemented it will definitely improve the tax to GDP ratio in a significant way and as far as indirect taxes are concerned clearly the early enactment of GST is a path forward.Now on direct taxes then, on direct taxes attempts to enlarge the tax net has really competed with attempts to increase the threshold of exemptions. The overall fact remains that agriculture maybe contributing shrinking percent of GDP but it does give employment to a very high percent of the overall Indian population, 55 percent of people, numbers vary whether it would be 45-55 percent but a very large percent of people are a still dependent on agriculture and agricultural sector is completely exempt from taxes.Certainly it would be very foolish to plead, first of all that is in the domain of the states - it would be foolish to plead that the income tax should be extended to agriculture. But look for instance the kind of anomalies which the Finance Minister has himself pointed out or tax people have pointed out that if you go on an average Diwali day to find out where are the maximum number of Mercedes-Benz and Lamborghinis are, you will be quite surprised it is some towns in Punjab which are from agricultural income and all exempt from agricultural income.So, what can be an innovative way of really without hurting farmers in any way or hurting farm incomes in any way or upturning what manner of distribution of the taxation ranges how does one really deal with this kind of phenomena which leaves out a very large portion of the people outside taxation network.Also if you look at the number of people who are paying taxes above Rs 1 crore it is a laughable number and it is a shame for me to confess that I was the revenue secretary for several years when we did bring down the tax rate very significantly but clearly for the tax authorities to be able to see why such a miniscule number of people when everybody knows that the reality is the opposite. Are really the taxpayers of just above Rs 1 crore the total number.Q: But let me also ask you this in the context of giving the FRBM Act much more teeth. As I pointed out and you admitted yourself that it has it flaws. Is there a need to have an independent council that monitors the effective implementation of the FRBM Act, because parliament clearly hasn’t done that job?A: The more you have in terms of councils or regulations, the more inflexibility you will eject into the system and the western world has moved away from inflexible norms to flexible norms. Look for instance if it is not the United States of America how would the world have looked upon the pursuit of this unconventional monetary policy. I think that countries and sovereigns need flexibility and there are only so much that you must bind them to. I am not saying that that in any way this reflects the kind of stuff which will come out of the FRBM committee, that’s the committee will certainly need to deliberate, but this idea of the council which you are mentioning is one of the recommendations I know of the 14th Finance Commission and the 13th Finance Commission. By the way who headed the 13th Finance Commission out of curiosity, it was Vijay Laxman Kelkar. Vijay Laxman Kelkar is also the author of the FRBM, so two successive finance commission have mentioned this, but I am only talking in terms of is the world moving towards excessive regulations or is the world wanting sovereigns to have greater flexibility. This is a generic debate on which there could be very different points of view. Also I do want to say that I don’t want to pre-judge at all in any way that’s for the committee. I am privilege to have such an outstanding committee which has Urjit Patel, Arvind Subramaniam, Sumit Bose and Rathin Roy as members of that and each one of them have done a lot of work on this. They are exceedingly knowledgeable. I do want to say that if you look at the initial first FRBM Act the 3 percent magic number - - the rationale of it if I may say is somewhat opaque without wanting to cast any ring that it is not intellectually sound.Q: I started by talking about Montek Singh Ahluwalia and he says that, he said that there is no explicable, justifiable reason for that 3 percent number?A: By the way incidentally, I have still to delve into the archives more deeply, but I would say prima facie that this seems to have been just a number taken from the Maastricht Monetary Stability Pact. The Maastricht Agreement in Europe which talks of the 3 percent for purposes of a monetary union, which is qualitatively different then when you begin to talk in terms of growth and emerging markets (EM) for them growth, poverty, employment these are crucial issues where one kind of a paradigm which the western world have followed may not be mechanically replicable. Another reason two that even in the Maastricht Treaty if you look at it - - talks of four criteria. It talks of fiscal deficit. It certainly talks of debt sustainability as a very important component. It talks of interest rates and it talks of inflation. It is four set of parameters which is the basis of the Maastricht Treaty. Now I have written and that is purely not in my capacity as the chairperson of this group for which I have been privileged that the government has thought it fit to appoint me, but I have written two pieces in the Hindu one has to say that chasing just one fiscal deficit target may be even a violation of the Maastricht Stability itself which had multiple criteria and not one criteria. The target must be macro stability which is not contingent on one particular criteria, but I think that these are matters on which we will need to study and consider very carefully and consult all stakeholders, consult for instance international institutions, consult for instance rating agencies which look at some of these things very carefully, consult and look at the best international experience on this and these are some of the papers which the committee is commissioning and has commissioned for purposes of being prepared for the consideration of the committee on the multiplicity of this including for instance the widest possible consultation with stakeholders.Q: So the committee has already commissioned these papers?A: It is proposing to commission these papers on some of these core issues some of which we have talked about. Q: Would it be fair then to say that broadly these would be the four pillars that could drive the overhaul of the FRBM Act?A: Perhaps not because what I mentioned was just episodic illustrative, but we do want to have a look at international experience, international benchmarking and see it not only in the Indian context - - unfortunately the Indian context has got its own special problem and these need to be country specific, circumstance specific, historically to adopt one set of paradigm necessarily. These are matters which require a deeper consideration.Q: Again without getting into any business of pre-judging October 31 is by when you need to give in your recommendations to the government. Do you believe that perhaps as early as the next budget we could see movement on the back of the recommendations that your committee makes that the government would like to take forward?A: The committee’s mandate is to submit its recommendations or its report to the government. It is entirely government’s prerogative what it wants to do with the committee’s report, junk it in the wastepaper basket, seeks the committee’s view on something or the other, reflect it or not reflect it. These are the prerogatives of the finance minister and the prime minister. Our mandate is to submit the recommendations and we will adhere to the timeframe of the October 31.