New goodies to the states: Bad news

The massive fiscal federalisation that was announced yesterday by our besieged finance minister, Arun Jaitley, is inordinately seductive. The 29 states, seven Union Territories, and one National Capital Region stand to together get Rs. 5,260,000 crore (or Rs. 52,600,000,000,000, or Rs. 5.26 trillion, or $84,760,000,000, or $84.76 billion) over one fiscal year.

Over the disbursal period – 2015-16/2019-20 – the total devolution from Centre to states will be Rs. 39.48 lakh crore (or $637.19 billion, or two-thirds of $1 trillion).

Some states, being less equal than the others, will get a less-than-fat share. Delhi will get substantially less than it would have had it been a full-fledged state. Many, many states are about to begin moaning. Keep your ears open and your eyes peeled.

Here’s why I, personally, am a tad wary about this second Geschäftsblitz (the first being the cynical rearrangement of the GDP calculation baseline earlier this month).

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1. A windfall of this blinding quantum should have been preceded by an empowered Jan Lokpal in every state – and a beefy, autonomous ombudsman at the Centre. This gift horse looks to be a nightmare.

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2. There is little point in extending such irredeemable largesse to state governments known to be iffy with their current finances – Bengal, Uttar Pradesh, Maharashtra, Andhra Pradesh, Himachal Pradesh and Gujarat, among others.

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3. The Gross Domestic Product (GDP) in India expanded 7.5% in Q4 2014 over Q4 2013. The annual growth rate of GDP in India had averaged 5.83% from 1951-2014, reaching an all time high of 11.4% in Q1 2010. And what brought about this spectacular GDP fireworks – an 8.2% year-on-year bit of rocketry – wasn’t any on-the-ground accomplishment by the Modi government but the hon’ble finmin’s diddling the way the GDP is calculated: market price instead of factor cost and baseline-shift from 2004-05 to 2011-12. All to the general amusement of global fiscal wonks, in general, and the perturbation of major market-lenders, in particular.

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4. This giveaway avalanche releases the finance minister from the responsibility of delivering a truly budgetary budget – one that would have been answerable and been debated to shreds. This prebudget delivery is a stun grenade, designed to sock the  brain while the body politic gets hooked to the windfall.

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5. The Sensex is hovering round 29,000 as I write. I have little doubt that it will cross 30,000 over the next week. But it will be a more disconnected Sensex than usual, with nothing showing on the ground: not fiscal consolidation, not inflation control, not manufacturing increase. And rises in GDP consistently negated by inflation. To me, this fiscal federalisation looks like wanking off on an economy artificially fattened.

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6. It is all too much largesse, like suddenly stuffing the chronically underfed. Many states – particularly those fiscally-starved or -incompetent or -bent (or, worse, all three) – won’t be able to handle this windfall well, or in the way it should be: not without a spectacular (or, at the very least, reparative) change in governance.

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The last isn’t going to happen. The 2015 budget of Bengal’s finance minister, Amit Mitra, for instance, has been, literally, saved by this clanging from the Central bell. (Mitra had calculated a revenue deficit 2014 of Rs. 3,488.49 crore down from Rs. 13,308.1 crore in 2013 – and had not been able to explain why.)

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I would like to be proven wrong, of course. But the portents aren’t good. Not that it hasn’t been done – Nigeria carried out a massive relocation of its GDP baseline, but the necessity of the step was validated by the international lending agencies. In our case, it’s left them perplexed, because there was no need for it.

Arun Jaitley shifted the baseline closer to today by five years – which means that for budgetary impacts to be calculated by ‘taking a gander at the backstory’ – as well as setting a comprehensive, comprehensible budget (this year) – just became an exercise in subjectivity, and budgeting just became an opaque, mystical exercise.

This looks like all the world a prebudget deflection of budgetary responsibility. And the data redactions inherent in such unconventionality have made the corporates unhappy. Profits in India in the major manufactories are based on the level of subsidies and other indirect forms of largesse. With a massive hank chewed out of the Central exchequer, corporate profits will drop. There’s no way round it.

I cannot, to take a narrow instance, envision automobile – commercial and noncommercial vehicles – manufacturers as rolling a profit from this fiscal federalisation. (From the BJP’s train-wreck, amended version of the Land Acquisition Bill, yes – but that’s another story.) On the other hand, roadworks ‘noncorporates’, who freelance off the states’ discretionary funds, will rake it in – because 70% of the New Faux Federalisation is discretionary.

Many states will now be absent any incentive to “generate their own resources” – also because many lack the superstructure for resource-generation. Moreover, resource generation takes far longer than the five years this federalisation will be in operation for.

And that is another reason for my doubts: It is limited to a year more than the BJP’s current tenure. After that, what? Is the government going to set adrift those states, too, that haven’t been able to pull up their socks? My bet is: Not if they vote BJP.

This is trading on fear. “What if another dispensation pulls this largesse? After all, it’s neither Ordinance nor Act.” “Maybe the BJP won’t pull it. Vote BJP.”

This fiscal federalisation is not meant to federalise politically. The opposite, rather. It will strengthen the power already invested in this Central government.

It is clever (maybe too clever by half: as a stratagem, it’s transparent): Relocate the GDP baseline near the start of the 12th Five-Year Plan. Make full use of the Mid-term Appraisal this year. Use the previous Plan baseline shift to roll out a 13th Five-Year Plan in 2017. Utilise it politically in the GE 2019 – wielding the continuation of fiscal federalisation as a weapon.

The Congress must be wishing that it had been this dextrous.


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