New Delhi: India’s ability to fight Covid-19 largely rests on how well it manages Centre-state relations, NK Singh, the chairman of the 15th Finance Commission, said.
Singh was addressing students of the Indian Institute of Management (IIM), Bangalore on Wednesday through video conference.
“Giving a lecture on ‘Impact of Pandemic on Fiscal Architecture – Fiscal Federalism in the Near Future’, I stressed the need to reset the fiscal architecture in light of the pandemic. Unlike other countries, India has far more harmonious management of the Centre-State polity,” Singh tweeted.
He said the states, which are fighting the pandemic, need resources, and the government should relax their borrowing limits. “This is the time for fiscal norms to be suitably relaxed. States need greater room to meet additional obligations caused by the pandemic,” IIM Banglore said in a tweet quoting him.
In order to give fiscal space to states in this time of crisis, the Union government recently raised their borrowing limits. Announcing the last tranche of Rs 20 lakh crore ‘Atamnirbhar Bharat Abhiyan’ (Self-Reliant India Initiative) on May 17, finance Minister Nirmala Sitharaman said the Centre also accepted the demand of states to raise their borrowing limit from 3% of their respective gross state domestic product (GSDP) to 5%, and this would give them additional resources of Rs 4.28 lakh crore during the Covid crisis.
The increased limit, however, depended on implementation of reforms by the states in four areas — one-nation-one-ration-card, ease of doing business, power distribution, and urban local body revenues, she said. In a statement, the finance ministry on July 12 said that it issued a formal communication to state governments raising borrowing limits by 2% of their projected GSDP in 2020-21 subject to implementation of specific state-level reforms.
Speaking at IIM Bangalore, Singh explained the concept of “fiscal federalism”, a term first introduced by the German-born American economist Richard Musgrave in 1959 that deals with the division of government functions and financial relations between levels of government.
He revisiting the evolution of fiscal federalism in India, which primarily dates back to pre-Independence era and emanates from the government of India Acts of 1919 and 1935. While the 1919 act provided for a separation of revenue heads between the Centre and provinces, the 1935 Act allowed the sharing of Centre’s revenues and the provision of grants-in-aid to provinces.
He also explained the difference between “Union” and “Federation”. “Political scientist Alfred Stepan classified India as a “holding together” as opposed to a “coming together” federation. Unlike the federal form of government in the United States, which is described as an indestructible Union composed of indestructible states, India is an indestructible Union of destructible states,” he said.