This is not how Centre should be dealing with recession

K N Balagopal writes: Cutting down funds to states, monetising assets could aggravate the crisis.

Union Finance Minister Nirmala Sitharaman, while announcing the National Monetisation Pipeline (NMP), said that asset monetisation is based on the philosophy of creation through monetisation and is aimed at “tapping private sector investment for new infrastructure creation”. If one looks at the two volumes of details provided by the NITI Aayog — and the economic policy of this government — it will be clear that NMP has nothing to do with infrastructure development. It is, instead, a cover-up of the massive resource crunch the country is staring at.

The Centre is facing a serious financial crisis because of the exigencies created by the pandemic and its own policies that are tuned to help big corporations. The lakhs of crores of cess and surcharges it has collected haven’t helped the government tide over the crisis. NMP will aggravate this crisis. Disinvestment of profitable Navratna companies will result in a loss of dividend, a major source of income for the Centre. Tax exemptions to the so-called investors will take away another major share of income. Central funds will be squeezed and this, in turn, will have a bearing on state finances.

The Centre is now advising panchayats to find ways to monetise their properties. Panchayats are being asked to sell their capital assets and use the money for revenue expenditure.

NMP will seriously hurt the interests of the country. The government must rethink this policy in the interest of the people, the country’s political and economic sovereignty and the federal character of the polity. These policies reflect poorly on the government’s economic management and speak of the lack of planning at a time when the economy is undergoing a depression.

In Kerala’s case, the Centre’s policies will lead to a sharp fall in revenues. From next July, the compensation grant for the deficit in GST from the stipulated 14 per cent will be stopped. This year, Kerala got around Rs 13,000 crore as GST compensation.

Kerala has also suffered a huge fall in the revenue it was getting from the divisible pool. The state was getting about 3.92 per cent from the divisible pool in the 1970s and 1980s. It came down to 2.66 per cent and 2.34 per cent in the awards of the 12th and 13th Finance Commissions. The 14th Finance Commission award increased it to 2.45 (2.50) per cent. Now, the 15th Finance Commission has reduced it to 1.92 per cent. This arbitrary cut is a result of the adoption of certain new yardsticks by the commission without considering the state government’s views.

In 2019-20, the state got around Rs 17,000 crore from the divisible pool as per the 14th Finance Commission’s recommendation. We lost about Rs 6,400 crore in 2020-21 after the new yardsticks given by the 15th Finance Commission were put in place. The 15th Finance Commission’s special grant (RD grant) of Rs 19,800 crore for this year will no longer be available in the coming years. Karnataka and many other states have also suffered because of the policy to reduce the divisible pool share.

Kerala’s annual expenses are about Rs 1,10,000 crore. The state will face a shortfall of Rs 32,000 crore in its revenues. This decrease is a result of reducing the state’s share in the divisible pool by Rs 7,000 crore, stopping the GST compensation of Rs 13,000 crore due to the state and the discontinuation of grants amounting to Rs 12,000 crore. Many other states are facing a similar resource crunch due to the Centre’s policies.

The huge tax exemptions to big corporate houses has aggravated the situation. Exemptions amounting to Rs 99,842.06 crore were extended to corporate houses in 2019-20. Many taxes on goods were reduced because of electoral compulsions. This reduced central revenues. Along with such tax exemptions, the increased use of cesses and surcharges is responsible for the shrinking of the shareable pool. The shareable resources with the Centre was around Rs 6.8 lakh crore in 2019-20 which has come down to Rs 5.5 lakh crore in 2020-21.

During the discussion on the GST Bill at the Select Committee of the Rajya Sabha, of which I was a member, the Left parties had given a dissent note which pointed out that such a tax will put an end to fiscal federalism. In fact, B R Ambedkar, while justifying the Constituent Assembly’s decision to leave the Sales Tax with the states, had said that this tax would be the only source of revenue for the states. Now, that has been taken away.

States begging for resources does not augur well for cooperative federalism. Instead of helping states to face this economic depression, the Centre is busy cutting its resources. All the cesses and surcharges that are not shared with states come to about 20 per cent of the total revenues of the Centre. States have been demanding that this money should be shared with them, particularly while fighting a pandemic. Kerala, for example, is spending a huge amount to help people face this crisis.

Developing basic infrastructure and the production sector is the only way to face an economic crisis. The Centre has the responsibility to help states in this respect. That should not be done by selling or handing over public assets to private individuals and corporations.

This is not the way the world faced the past two depressions. We need massive public investment that will help people to form cooperatives and collectives in agriculture and industrial production. Parliament, the National Development Council and the GST Council should discuss this unprecedented situation. We need to find a way out collectively. Handing over the rights on public properties to private individuals will take the country back to the colonial era. This must not be allowed.

This column first appeared in the print edition on September 17, 2021 under the title ‘How not to deal with a downturn’. The writer is minister for finance, Government of Kerala.

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