FM is honest and correct, the figures speak for themselves, says NK Singh on Centre versus South

NK Singh, Chairman of the 15th Finance Commission

Weighing on the raging debate between the Centre and southern states on the sharing of tax revenues, the Chairman of the 15th Finance Commission NK Singh said Finance Minister Nirmala Sitharaman is “absolutely honest and correct. She has put across the figures in the public domain and the figures speak for themselves.”

Southern states, including Karnataka and Tamil Nadu, have accused the Centre of unfair treatment towards them in tax devolutions over the past few years. Responding to these allegations, Sitharaman has said these claims are "wrong and mischievous" since the Union government goes by the recommendations of the Finance Commission on this.

Singh was referring to the rebuttal by Sitharaman on February 7 wherein she said that one of the protesting states Karnataka will be receiving more funds during the five-year period of the 15th Finance Commission compared to the period covered by the previous panel despite the precipitous drop in revenue during the Covid-19 period.

“The criteria and the norms have not undergone any significant change in 70-75 years,” according to Singh, the head of the panel that decided the formula for sharing of tax revenues between the Centre and states for the period of 2020-2026.

However, he said that one must recognise that this divisible pool on tax revenues is constituted after deducting cess and surcharges, which does not fall under the domain of the Commission.

The former bureaucrat also flagged concerns over the total debt of many of the southern states and advocated for prudent micromanagement.

NK Singh spoke to Moneycontrol on a range of issues from India’s fiscal commitments to the one nation, one election proposal.

Edited Excerpts:

In the interim Budget, we witnessed aggressive fiscal consolidation by the central government. The fiscal deficit saw a huge 70 basis points cut to 5.1 percent of the GDP in FY25. How realistic is this goal according to you, given that there are concerns that global growth, including India, may slow down next year?

I think this target is grounded in both confidence and realism. Confidence, because you can take on a daunting fiscal consolidation target provided you are confident that your overall economic growth, both in real and nominal terms, expectation of range-bound inflation and revenue buoyancies will enable you to reach the kind of fiscal consolidation roadmap, which you have in mind. It is also a necessity because clearly, it is the recognition of the fact that due to the exogenous circumstances of the pandemic, the fiscal numbers had gone up far beyond what the path was before the pandemic. It is a resolve to get back to more acceptable fiscal numbers. So, the contribution of macroeconomic stability, as one of the leading pointers for long-term sustained growth, can continue enabling India to achieve the 7-percent plus growth rate in the medium term.

Do you see India growing close to 7 percent next year?

We are among perhaps one of the very few countries, who after a pandemic, for four successive years have registered a 7 percent-plus growth. This is the outcome of a very prudent macroeconomic policy, outcome of the multiplier gains of the deep structural reforms undertaken and of prudent and aggressive adoption and harnessing of the power of technology. These will drive rates of economic growth to upwards of 7 percent. We need to do this to reach the objective of becoming a Viksit India, or a developed country, by 2047. It is a realistic target and, I think, we have no option but to proceed on this trajectory.

While some say India is witnessing a K-shaped recovery in growth, those in the government have rejected this theory. What is your view on this?

I was quite attracted by the comment of the finance minister that she was not attracted to which alphabet you choose. I fully agree with that comment, because I have always been a bit wary, if not sceptical, about the choice of the alphabets. Because if you are talking of inequality, then very frankly speaking, in all measures of equality which we know, it does not look like we have become any more unequal than we were if you do the measurement in terms of either rural or urban equality. What it does mean is that the urban sector also needs a social security programme. It does mean that we need to adhere to the commitment made to double farmers’ income which is part of the government’s effort. Those are the more important things to concentrate on than really looking at which alphabet reflects the kind of growth rates we have.

If you had the choice to pick an alphabet to reflect the current growth trajectory, what would be your pick?

I would not want to choose an alphabet at all, I would go with the more conventional way. I think alphabets are good for a slogan, but alphabets are not necessarily the best way of selecting patterns of economic growth.

The Indian government has been in a running battle with global rating agencies – S&P Global Ratings, Moody's Investors Service, and Fitch – as it thinks that the lowest investment grade rating assigned to the country is not a fair reflection of its economic strength. What is your view on this?

Our concerns about the methodology of the rating agencies have been an ongoing issue. We have been questioning the ratings for a reasonable length of time. And that concern continues to exist because the same methodology is not being employed for all countries. If you look at the debt-to-GDP ratio of G7 countries they are way above 100 percent and the snub is that India should not compare itself to a developed country. I have concerns about the sanctity, reliability, credibility, and transparency of the methodologies of credit rating agencies not applying common standards.

Now this Budget, by continuing a credible path of fiscal consolidation and a credible path of managing debt-to-GDP ratios within acceptable limits, should be a contributor in an improved rating for India, which we deserve. If you continue on this fiscal path, the debt-to-GDP ratio will begin to look in the southward direction and not in the northward direction. And that is a very important signal to rating agencies and the market.

FinTechs have been touted as a key driver of India’s digital ambition. We have seen RBI’s recent action on a crucial payment platform and Paytm Bank. Are they going wrong while balancing exponential growth with compliance?

I have no specific comments to make on this (Paytm). But I would want to go with the best judgment of the regulator.

For the last few days, we have seen the battle between the Centre and states heating up on the devolution of central funds. Southern states like Tamil Nadu and Karnataka have alleged that they are being penalised for being fiscally prudent and effectively controlling the population and being denied their legitimate share, while the fiscally weaker and more populous northern states are getting the bigger piece of the pie. As the chairperson of the 15th Finance Commission how do you view these claims?

To give you a broader picture, the finance commission as an entity existed even before India became independent. Before me for 40 years, all finance commissions were asked to use the census data of 1971. We were for the first time asked to use the census data for 2011. Right from the very beginning one of the criteria finance commissions have used is population. For 40 years, when the 1971 census was used that reflected one kind of a story, now when you use the 2011 census it tells a different story. When the 15th Finance Commission was undertaking this exercise, we were of course conscious of the fact that this would mean that no matter what we do, the likely share of some of the states may suffer in a disorderly way. So the best we could do is that we did introduce criteria on demographic management to recognise states that invested in girl child education, improved education outcomes, and planned better. They should not be penalised because their population growth has been less than the population growth in some of the other states.

Now we arrived at a normative formula for the divisible pool of 41 percent, after taking out cess and surcharges. And based on that the allocations are done. So, the finance minister is absolutely being truthful that the allocations are made in accordance with that normative formula. The normative formula for the first time (under the 15th Finance Commission) introduced demographic management and lowered the weight given to population and geographical area. The criteria and the norms have not undergone any significant change in 70-75 years. Another criterion is the income distance method, and if we did use that method more rigorously, then some of the more developed states would have to suffer given their high per capita income.

We have also given funds to urban local bodies, increased the amount for disaster management, and paid a hefty revenue deficit grant. These are grants that come out of the Consolidated Fund of India. That which comes out of the horizontal tax devolution does not come out of the Consolidated Fund.
The spirit of the 41 percent from the divisible pool has been fully honoured, but one must recognise that the divisible pool is constituted after deducting cess and surcharges and that is not under the domain of the finance commission.

What is your take on the claim by states that the Centre’s increasing reliance on cesses is hampering their finances?

Whether or not cesses and surcharges should become part of the divisible pool is an issue for Parliament to debate, it is not for the finance commission to deliberate. As an economist, I would say that the obligation of the central government has gone up significantly. And, we must appreciate the new geopolitical and security challenges that the country faces today. These huge financial liabilities are due to the new challenges and you want India to have world-class infrastructure to improve overall efficiencies and sustain economic growth of 7 percent plus. These are huge expenditures for the Centre. We must be cognizant of the newer obligations. The debate is still open. The infrastructure and security challenges today have vastly enhanced the functions of the central government. So, one should not make a simplistic remark that cess and surcharges should be calibrated.

Is it a case of the southern states over-committing and not being able to meet…

Well, look at the fact that the overall debt of many of these southern states is certainly a matter of concern. Prudent micromanagement is also an aspect that must be taken into account. But that is for the state government to decide. But the finance minister is absolutely honest and correct. She has put across the figures in the public domain and the figures speak for themselves.

We had individually met all southern states, in fact, we met all states as a commission, we heard them at great length. And their submissions were reflected upon. These meetings were done before and after the interim report of the 15th Finance Commission. In fact, we began our journey from a southern state. We had extensive discussions with state governments as well as political parties.

If one were to be a devil’s advocate, if you read the Constitution, the finance commission is under no obligation to provide resources to the third tier. The finance commission’s only obligation is to ensure that a state’s finance commission is constituted so as to augment the consolidated fund of the state enabling it to meet the expenses of the third tier. But recognising there are needs and lags, we have given a very large grant to the third tier, which has all gone to the states.

If you had one advice to give the newly constituted 16th Finance Commission led by Arvind Panagariya, what would it be?

I do not think the previous commission should give any advice to the next one. I would not give any advice to the 16th Finance Commission, because they are experts. I have profound respect for the Chairman and all the experts on the panel.

But one advice to the states would be fuller adherence to the obligation that states themselves have taken up because each of them has their own fiscal responsibility Acts. That includes a certain fiscal target and if they can adhere to that it will improve the overall picture.

Can one nation, one election become a reality?
Deliberations are going on. The committee of which I am a member is not looking at whether one nation, one election can become a reality. We are addressing the terms of reference and that is what we will do. As per the terms of reference, we have to submit the report as early as possible. After that it is for the government to decide what they want to do with our recommendations.