Addressing Fiscal Worries of States

• IAS NEXT, Lucknow
• 20, Nov 2021

Centre will release over ₹95,000 crores in one stroke to States this month after Union Finance Minister met with Chief Ministers and State Finance Ministers to discuss the state of the economy and to sustain the recovery from the COVID-19 pandemic.

Implication of such an announcement

• The Government set aside the spate of recent confrontations with States over 
  • Revenue
  • GST compensation concerns
  • Fear by States about ‘encroachment’ on their powers, 
• The measure shows that government has taken steps to initiate an economy-focused dialogue independent of Budget consultations and GST Council machinations.
• Its ready acceptance of States’ request to expedite the sharing of taxable revenues is a token of faith to reinforce federalism.
• While most States have positive cash balances, access now to double the funds than usual will help them ramp up capital expenditure. 
• The cash flow could also help several States catch up on their capex targets, on which hinges an additional borrowing limit of 0.5% of their Gross State Domestic Product. 
• The Finance Ministry's clarification that the excise duty cuts on petrol and diesel shall not dent the tax pool shared with States has also soothed frayed nerves.
• The meeting with CMs yielded several ideas and policy proposals, including a simple demand that the Centre share leads about prospective investors and come out with a clear policy on green clearances.

Challenges Ahead

• While the Finance Ministry believes that investments are on the verge of a take-off, public investments need to increase for several more quarters before the private sector can be expected to spur the economy’s growth. 
• The Centre and States need to combine forces to make it an easier and swifter journey to reduce the red tape for potential investors.
  • Commerce and Industry has said that just 10 States have joined the single window clearance system for investors, and four more may join next month.
• Investment facilitation was a key agenda item, so it would have been apt to include the Industry Minister in the deliberations to nudge States into joining the single window system. 

Way Forward

• We need to sustain this free-wheeling economic dialogue with States because the economy still needs collective hand-holding, 
• Also, this economic dialogue needs a broad-basing of the framework to include key economic ministries, and occasionally, the Prime Minister too.
• Closing this somewhat informal channel for dialogue with the States, outside the framework of NITI Aayog and the National Development Council, would be a wasted opportunity with embedded economic costs.