Continued engagement with states and alleviation of their fiscal concerns will boost the economy

Centre state relationship

Source: The Economic Times

Context: 

The Centre will release over ₹95,000 crore in one stroke to States this month, Finance Minister Nirmala Sitharaman announced on Monday, after meeting with Chief Ministers and State Finance Ministers to discuss the state of the economy and to sustain the recovery from the COVID-19 pandemic.

Reasons without such a move:

• States necessary for the economy: It is impossible to revive the country’s long-somnolent investment cycle without States working in tandem.
• An effort to solve the concern over revenue: recent confrontations with States over revenue, GST compensation concerns, and their fears about ‘encroachment’ on their powers, to initiate an economy-focused dialogue independent of Budget consultations and GST Council machinations.
• To ramp up capital expenditure in the economy: 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.
• High surcharge on excise: The basic tax component of the entire tax on oil amounting to ₹3.72-lakh crore is merely ₹18,000 crore, rest of 95% of the tax is collected as surcharge, which goes to the centre alone. In this context, 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.

A Positive step - Comments on new fund allocation for states:

• Sign of cooperative federalism: The rare and ‘one-off’ meeting with CMs yielded several ideas and policy proposals, including a simple demand that the Centre share leads about prospective investors and enunciate a clear policy on green clearances.
• Focus on public investments: It will need to do such capex expenditure announcements for several more quarters before the private sector can be expected to spur the economy’s growth.
• 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 - for economic growth:

Fighting red-tapism: The Centre and States need to combine forces to make it an easier and swifter journey through red tape for potential investors.

Sustain this free-wheeling economic dialogue with States because the economy still needs collective hand-holding.  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.

Multilateral engagement with ministries: It also merits a broad-basing of the framework to include key economic ministries, and occasionally, the Prime Minister too.