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Updated: Jan 29, 2019 16:11 IST

While the Centre has displayed remarkable commitment to the cause of fiscal consolidation, the fiscal space created by the Centre has been compromised due to fiscal profligacy of the states, says Fifteenth Finance Commission chairman NK Singh in a conversation with Roshan Kishore and Rajeev Jayaswal. Edited excerpts:

The Fifteenth Finance Commission (XVFC) has to submit its report by 30 October, 2019. What are its salient features?

The details of the Commission’s recommendations cannot be divulged before they are submitted. However, I can tell you that this time I’m bringing out a separate volume on, what I call the state of states, in which, for each state, we are not only looking for fiscal and macro parameters, but also other aspects such as the structural changes they can pursue for inclusive development and faster growth. I’m going to have state-specific recommendations. It will also capture details of the third-tier [local government].

Will these details help states in their development process?

In a very significant way. For instance, under the Constitution, there is no direct mention that the finance commission has to devolve money to the third-tier. But it is expected to give recommendations for augmenting the consolidated funds of the states based on the recommendations of the state finance commissions. Now, the picture with regard to states’ finance commissions are varied. In some cases they are still hanging around the third finance commission. In other cases, reports have come but they are not placed in legislatures or reports are tabled, but not implemented. So, we are also looking into the story of state finance commissions.

Has the centre-state coordination weakened after the Planning Commission was abolished? Do you think that there is a need for some institutional mechanism?

NITI Aayog is very credible and potent entity with a wide-ranging term of reference. Overall, the mandates of the two are completely different, and they are not comparable. If your question really is about the need for a mechanism to strengthen relation between the centre and states, I believe, one very credible institution that is the GST [Goods and Services Tax] Council. All its decisions have been unanimous. The Constitution never visualised the Planning Commission. The Constitution, however, visualised the Inter-State Council, which is largely dormant. It should be activated as part of the Prime Minister’s consultative mechanism.

Some states expressed their reservations with regard to the terms of reference (ToR) of the XVFC, especially on the population parameter.

The finance commission does not decide its ToR. Unless the President of India changes the ToR, it is fait accompli for the XVFC. There has been some fear that using 2011 and not 1971 population figures could penalise states which have done well in demographic management. I can tell you that the XVFC is committed to the principle of rewarding efficiency while recognising equity. Population figures would only be used as one of the criterion for horizontal allocation of revenue among states, and these are only one among the four types of grants to states the finance commission decides upon. States with different demographic structures have different requirements – Bihar might need more resources to educate its young population, while Kerala would probably need funds to take care of the health expenditure due to its older population – and the XVFC will do what it can to address these concerns.

Some states have promised farm loan waivers, ignoring their precarious fiscal conditions. You have been the chairperson of the Fiscal Reform and Budgetary Management Committee. Aren’t you concerned?

While the central government has displayed remarkable commitment to the cause of fiscal consolidation, the fiscal space created by the centre has been compromised due to fiscal profligacy of the states. Foreign investors and multilateral agencies, however, look at combined deficit and debt levels of both central and state governments. Debt levels of some states are so high that they cannot achieve earmarked targets without a significant disruption in their regular economic commitments.

Is Punjab one among them? Once a prosperous state, it is facing acute financial crunch. Do you have any solution for such states?

Punjab, in spite of these problems, continues to be one of the rapidly developing statea. But, its growth is well below its potential. Main problems are three-fold; the financial problem, particularly the legacy debt of over Rs 30,000 crore and its interest payment itself eats into the resources that should have gone into developmental expenditure. Secondly, its overdependence on wheat and paddy that has sunk the ground water aquifers, which can be checked through crop diversification [by] guaranteeing assured farm income. The rising incidence of cancer [due to high arsenic toxicity] points in the same direction. And, the third issue relates to industrialisation. A faster industrialisation will create jobs for the youth who can be weaned away from drugs.