The Centre for Social and Economic Progress hosted a talk on “Transfer of Budgetary Resources to States: Is it North Vs South or North and South?” by Pinaki Chakraborty, Vice Chairperson, Institute of Development Studies (IDS) on Friday, June 07, 1:00 – 2:15 PM. Attendees joined online via Zoom. The seminar was streamed live on YouTube.

Abstract

In recent months, we have seen vociferous protests from some of the southern states on the issue of devolution of resources from the union government to these states. The claims of a denial of a fair share of resources from the national pool vis-à-vis those that benefit from the redistributive transfers of that pool is a complex issue. The existing mechanisms of transfers in the form of tax sharing and grants are meant to provide fiscal space to the states for their revenue expenditure. There is no explicit mechanism to provide non-debt-creating resources to the states for capital expenditure. They have to borrow from the market for this purpose. The limits on market borrowings are determined by state-specific Fiscal Responsibility Legislation (FRL). This is a restrictive view on how to finance public investment at the state level. The inability of the states to finance capital spending over and above the borrowing limits prescribed by the FRL is acting as a limiting factor for capital investment, especially for poorer (in terms of per-capita income) states.

A time-bound reduction in the revenue deficit can enhance capital spending at the state level, and greater flexibility to access market borrowing to states may help augment capital expenditure and growth. Since some of the high-income states also have a large deficit in their revenue account, a prudent management of their finances is critical for fiscal stability. To the extent the decline in tax devolution has contributed to the increase in revenue deficits of these states, this needs to be quantified and, if required, necessary support can be considered based on the past precedence of performance-incentives grants provided by the Government of India or various Finance Commissions.

A comprehensive view of budgetary and non-budgetary flow of resources across states is necessary to understand the issue of under-development in some parts of the country. A view only through the budgetary lens is partial and unfair to poorer states.

Brief Profiles:

Pinaki Chakraborty is a Visiting Distinguished Professor at NIPFP and the Vice-Chairman of the Institute of Development Studies, Jaipur. Prior to this, he was the Director and Professor, National Institute of Public Finance and Policy, New Delhi, and Economic Advisor to the Fourteenth Finance Commission of India. 

Janak Raj is a Senior Fellow and leads the macroeconomic segment in the Growth, Finance and Development vertical at CSEP. He also works specifically on fiscal federalism in the health sector, climate finance and multilateral development banks (MDBs) reforms. He is currently also a member of the JM Financial Centre for Financial Research of IIM Udaipur. He has nearly four decades of experience working in the Reserve Bank of India, the International Monetary Fund (IMF) and Ministry of Finance (Department of Financial Services). Janak Raj served as an Executive Director in the Reserve Bank of India and as a member of its statutory Monetary Policy Committee (MPC). He also served as Principal Adviser of Monetary Policy Department and International Department of the RBI and headed its Department of Economic Policy and Research. At the IMF Washington DC, he was Senior Advisor to the Executive Director for Bangladesh, Bhutan, India and Sri Lanka. He served as an RBI nominee director on the Governing Board of the BSE (formerly Bombay Stock Exchange) and as a Senior Consultant in the Department of Financial Services, Ministry of Finance. He has a PhD in Economics from IIT Bombay.

Rajat Verma is Associate Fellow, CSEP.  He specialises in Input-Output/SAM Modelling and ecological taxation. He recently published a book titled “Fiscal Control of Pollution: Application of Ecotaxes in India”, wherein he critically examined the theoretical and pragmatic application of optimal rates of ecotaxation and their distributional impacts on households in India. In addition to his interest in Public Finance, he has also published innovative research papers on environmental taxes and international trade. He received PhD in Economics with a specialisation in Environmental Economics from the Institute for Social and Economic Change (ISEC), Bangalore which is affiliated with the University of Mysore.

Concluding Remarks

Shruti Gupta is a Research Associate in the Fiscal Governance team within the Growth, Finance, and Development vertical. She holds a Master’s degree in Economics from Ashoka University. Her research focuses on Public Finance Management, with a particular emphasis on addressing fiscal challenges in India. She aims to build a career in the domain of public policy. 

Media:

Tax origin not suitable measure for budgetary devolution to states: Study

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