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YV Reddy is an Indian economist and a retired Indian Administrative Service officer. Reddy, 77, served as governor of the Reserve Bank of India (RBI) from 2003-2008 and the chairman of the 14th finance commission from February 1, 2013 to December 31, 2014.
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Recently, Reddy co-authored a book named “India’s Fiscal Federalism', along with GR Reddy, an economist and member of the Indian Economic Service.
Around 80 percent of all government spending on health and education in India is done by the state governments while only 20 percent comes from the centre, Reddy wrote.
Successful state programmes are routinely appropriated by the centre and state governments are forced to implement them with their money and staff but the entire credit is taken by the centre, Reddy told CNBC-TV18.
In an exclusive interview to CNBC-TV18, Reddy spoke about his book, relationship between states and centre and RBI among a raft of other topics.
Watch the video here
Fiscal federalism is still a matter of a lot of contention. Right now Kerala government is complaining to the centre that it has given free land for Thiruvananthapuram Airport and the central government has given its governance to a private party. The centre is complaining to the states in general that it wants to give income to farmers but states are not giving land records. To begin with, what Kerala CM Pinarayi Vijayan is saying, do you think he has a point when he complains that the management of the airport should have been given to state-owned company?
First, let me clarify that this book is about fiscal federalism and essentially deals with imbalances. In a way, its scope does not extend to all fiscal relations between the centre and states but still, it is relevant because it has fiscal implications.
What is the perspective point of view – Kerala chief minister his stand is that the state has given land and all other facilities because it is a government airport and now if you the centre is privatising it then the central government has to pay for state's share.
I think there is a fair point there, it is very difficult to find fault with fairness. It is not necessary that the central government agrees because in many other cases before the central enterprise has taken the land and they sold and did not share with the states but I think that has been the complaint of the states that whenever there is an opportunity, they are exploited. I think that is why I am asking for empirical evidence even in my book.
What about the Centre’s complaint that they have this farm income but very few states have given them data, is it fair on the part of the states to stand in the way?
I think it is unfair but except the states’ point of view is simple cooperative federalism means the centre cooperates with states and they cooperate with the centre but every time you cannot say this is what I want and you cooperate. So, the state government can tell us how many schemes you supported us, number one.
Number two, the staff is state governments, there is no consultation about the scheme, except that it is your scheme for which I have to pay money. I have referred to this in the book also. Ultimately the question is whether something is a jointly arrived at a programme, then there would be joint ownership.
So, the best way of having such national programmes is perhaps to make any such scheme a joint scheme of union and states, describe it as such then there will be ownership. Otherwise, it becomes a competition for taking credit and that is not the best way of working out a federation.
Reading out a part on page 77 of the book where you say that the entire credit is taken by the central government whereas the schemes are jointly funded and implementation is done entirely by the states. That is perhaps the states' argument. Now, playing Devil’s Advocate – the center has started a lot of scheme over the last 75 years, which centre’s bureaucracy is elite, the politicians are better informed, better educated, so are not central schemes more useful. Social expenditure for instance like MNREGS are they not qualitatively superior?
Let me put this slightly differently. I was a secretary in the state government, I went as a joint secretary in the centre, so have become better because I went to the centre. Most of the bureaucracy in the centre, the so-called elite bureaucracy have been going from the state, so I don’t know on what basis one can say that they are superior or you can say that they are taken from outside IAS or whatever it is and again you can check up the background whether they become better than where they are supposed to be.
As far as politicians are concerned I don’t know if you have to choose between being a chief minister and a union cabinet minister what would any politician in India prefer, so do you mean that if you don’t become a chief minister you become a better person by becoming a union minister. So I keep saying that there is an impression.
Now for instance if we pick up the minister of agriculture and government of India. Just pick up a list of join secretaries, deputy secretaries find out their background and in what way it is related to agriculture and agriculture is essentially a state subject and the agriculture ministry is one of the largest in the government of India.
Agriculture, Education and Health are essentially a state government function concurrently only because of the advance of research but the largest bureaucracy is there. I worked in both and I don’t think I was better when I was in the centre than I was in the state.
Let me take up the way you have described your own book in the cover – some believe that the states relative to the centre do not adequately emphasise social expenditure. Do you agree?
One has to look at empirical evidence. If you take the total expenditure, let us say, in education; I think the numbers -- my co-author Dr GR Reddy can give. I think at an all India level if you take general government expenditure on health, I think more than 80 percent of the expenditure is incurred by the states.
80 percent of all the money spent on health is by the states?
And not by the centre.
Even after Ayushman Bharat and all that?
I believe so. My colleague who is working in Telangana government can confirm. The same with education.
80 percent is spent by the states?
Yes, out of each budget. So my limited point is when the centre is contributing 20 percent or 25 percent to the total of the national expenditure, who can make a difference. How health should be delivered in Kerala and how health should be delivered in Nagaland.
If you say that Delhi knows better about both. It’s little difficult to digest, in fact, I would even say that maybe Nagaland is better of learning from Kerala. So in a way encouraging states to learn from each other maybe more productive than getting into it unless there is proven wisdom.
Again let me say that there is one area where the union government is functioning with its own missionary in exactly the same areas – education and health in union territories. If any programme is tried out in union territories for one or two years and you are able to say that that is doing better, then you can advocate for the whole country
There is no such example?
I do not know.
You have been in charge of the finance commission.
I do not have data, finance commission jurisdiction doesn’t go in it, but my limited point is if I see all the flagship programmes, almost all the flagship programmes were in some state or other before.
Yes absolutely, midday meal scheme came from Tamil Nadu, employment guarantee came from Maharashtra.
It is considered as a populist measure. So when the state government does it, it is populist. When the union government does it, it is for peoples’ interest. Second, they have been adopted from different states but has the union government adopted experimentation from union territory. So you can make technical parameters, financial parameters, economic parameters to confirm your presumption that the central government somehow has superior capacities. It functions research. Definitely, most governments do that in certain areas definitely but not in most of the areas where maximum money is spent. The purpose of the book is to provoke because answers require more empirical words.
What about profligacy. Has the centre been fiscally more prudent than the states or have the states been more prudent? The impression is that the states have been profligate?
The data, again, if you have the data and it should be subject to confirmation. The capital outlay, I think capital outlay is important for development. The capital outlay by the state governments put together is double or more than double of the capital outlay of the centre.
So who is contributing more to the public investment in this country; 2/3rd is by the states and 1/3rd is by the centre. Second, who is contributing to savings or dissaving. Centre contributes to dissaving. The states as a whole are either marginally positively to savings or about close to zero.
Are you a little worried as both a former governor and a former chairman of 14th finance commission that now both are becoming fiscally irresponsible? We are seeing competing loan waivers, competing for farm income transfers. As a citizen of India would you worry that there is less going to be available for capital outlay if everything is going for income transfers?
As a citizen of India observing carefully, the issue is simple. State governments cannot indulge in fiscal profligacy because the centre has total control. Therefore, such schemes if the state government indulges in or gives away, then there is a limit because they have to sacrifice something else. It is hard budget constraint effectively imposed by the centre. Therefore, I am not that worried except that the people of the state should be worried because the money is being spent on other things.
However, when it comes to the centre, there is a problem. There is no such binding constraint, apart from the fact in whose jurisdiction it is, for instance, 14th finance commission observed that the defence expenditure and maintenance was not coming down whereas the programs in the state jurisdiction were increasing.
So the centre is spending more on state subjects than on its own subjects?
Yes, as a percentage of GDP. So the point is for the finance commission if you give more fiscal space to the centre, is it going to spend on its subject or state subject. You do not have that problem in the state subjects. Also, the rating agencies observe the central government fiscal. So my point is that type of fiscal profligacy at the time of the state, is less dangerous because there is a hard budget constraint.
It is more dangerous if it is the centre and more so if it is on state subject because it becomes an issue of inter-state inequalities. So there is both, fiscal sustainability of the country as a whole and possible disputes among the states.
I just want you to get away from the book and worry whether income transfers is the way to go forward at all? One always thought that the role of the nation or of the government was to build roads, provide infrastructure, provide railway tracks, and income should be generated by the people. If the government starts only worrying about incomes, then who will invest, who will put the next railway track? Is that not a worry for you?
There is a fundamental issue. There are public goods and there are private goods. The first priority should be public goods; there is no doubt about it. However, private good may have to be provided to some extent and there again this whole issue of fiscal federal transfer and its interest of minimum level but that has to be enabled by the state governments through various mechanisms. However, you have a problem if there is more expenditure on the consumption side and no investment.
So there are two levels; at a macro level, how much is government consumption because as you have noticed, government consumption expenditure is far exceeding its current revenue. So in a way you are already incurring the savings by the government if you are adding to the savings, it certainly is going to have the potential output seriously but worse, it is not one time. It is a recurring commitment and government will find it very difficult to reverse. So any commitment taken particularly by central government makes it extremely difficult to reverse.
So we have to worry that this Rs 72,000 crore that has been earmarked is going to be a permanent expenditure for future governments?
I am not saying that at the moment. However, what I would certainly say is that when a national government indulges in it, it also loses moral authority to stop the other states doing it.
So we could have competing income transfers in the days to come.
Ultimately do they continue forever? My point is simple, if it cannot go on forever, because you can do it on borrowed money for some time, when it becomes unsustainable, there is a breakdown.
You think we are heading for that?
No, I am not saying but all you have to do is project.
Once again coming to your book, clearly your book presents the states’ point of view very well. Would you say that the fiscal federalism moves in favour of the centre when there is a strong sovereign but if the centre is a coalition or if it is a weak centre then the states have a better chance, has that been an empirical observation?
Let me go back to what Dr Ambedkar said in the constituent assembly during the discussion - he referred to the presidential form and the parliamentary form. He said its issue of stability versus accountability. In a presidential form there is stability, in a parliamentary form there is accountability. So he said India is essentially an undemocratic society. We are better-off with greater accountability and continuous accountability. So I think we have to recognise that aspect.
The other aspect is being a complex society, the risks are to be avoided and strong governments may do well but may also not do well. So I don’t think we should look for anything more than the constitutional provisions, in letter and spirit which has helped us survive as a successful federation for 70 years. Letter and spirit of the constitution is the best.
I wanted to ask you why you have dedicated a book on federalism to Dr Ambedkar. We think of him more as, of course, the draftsman of the constitution – but we think of him as a jurist. Did he contribute to even federal relations in such a big way?
In fact, interestingly, he is known as the jurist but actually his specialisation is economics.
He was an economist?
He was an eminent economist and specialised in two fields. He studied in USA, Columbia University and in London University, his specialisation was in monetary economics and fiscal.
And in fact, in regards to fiscal matters, he gave very important lectures and at that time the problem with – how to balance in a federation, provinces and princely states. So the latest contribution he made is in the debates in the constitution.
In the debates whenever the sections relating to federal finance provisions came, he is the one who intervened and is able to convince the sceptics. So if you want to know the contribution of Dr Ambedkar, two federal finance apart from his specialisation in the subjects scholarship, his statesmanship comes through in the discussion.
The 15th finance commission’s terms of reference have evoked a lot of controversy, they have said things like you have to grade states and give them money in terms of whether they have too populist programmes, whether they are implementing the national objectives of India 2022 those kinds of goals, what are your own thoughts on the terms of reference of the 15th finance commission?
I would go back to the constitution and the system. The finance commission is intended basically to determine the formulae for sharing of taxes not transfers. The states have rights, but how much it is, is something to be determined by the finance commission.
So when they are sharing, it is a sharing of the taxes, you cannot attach conditions for sharing of taxes. So so far, 80 percent or more than 80 percent was under revolution formula, now the question is if you want to fulfil all these terms and conditions, you have to fulfil it within that 15-20 percent unless you increase it but the intention was this has to be residual.
So the danger is whether anything like that will be done. Second, with regards to the deficit, the priority is the needs – and now the needs and conditionalities, how do you reconcile the two. Third, the finance commission instrumentality of the policies and programmes of the government of day for that purpose there is separate transfers through NITI Aayog. So are you mixing up the two?
Also most important is the finance commission award acceptance – it is not approved with the parliament, no. If a president plays his action taken before the parliament because this was discussed in the constituent assembly, it is the matter of sharing between the centre and states, how can one party approve?
So the parliament doesn’t get to approve it?
That is how it says, action taken shall be placed by the president. Therefore, anything that you do in the matter of finance commission, if you want to respect the constitutional intent then it has to be something beyond this government of the day; for the government of the day, for those programmes there is another instrument.
Sentiments outside the finance commission, outside the sharing of taxes – that is the bigger scheme. So if this bigger scheme, so many factors, give a signal that finance commission is also being used to ask, it is being asked to do something, there is a sense of discomfort but one good news is that finance commissions in the past also were given such terms of reference and they need not necessarily stick to them, they can make their own judgement.
Because they derive their power from the constitution?
In fact about your own commission, 14th finance commission, commonly expressed charge by people who are speaking for the central government is that you have been too fair to the states, the share of the states which was 32 percent under the 13th finance commission, you increased it to 42 percent of the total revenues, that is quite a jump.
Yes. Let me put it differently. It is not quite a jump actually it is not comparable -- 32 and 42 percent. The correct position is 39 percent and 42 percent because the various expenditures are included. So comparison is 39 and 42 percent.
Have they implemented it as you designed it?
In the implementation there are two factors which could dilute it. One is the cesses and surcharges. When you increase the cesses and surcharges that is not shared. So to that extent, it comes down to below 42 percent. Second, in the expenditure for centrally sponsored schemes, you are asking the state governments to put some share. If you increase the share of the state and reduce your share, in a way you have shifted the burden. By doing this, if nothing else, there can be a dilution and perhaps the data will show how much is the dilution.
So it is not exactly a higher share.
What you are meaning is that the report reflected the states’ point of view. I think the report reflected what was objective with opposition, but it so happened that a chief minister later became the prime minister and therefore the recommendation might have appeared attractive to the prime minister due to his background as chief minister.
First Published: Mar 7, 2019 9:44 PM IST