FISCAL FEDERALISM AND HULLABALOO AROUND FREEBIES

How can the Centre justify its tax concessions to the rich while running a continuous revenue deficit? 

- DR TM THOMAS ISSAC

THE Union government has opened yet another battlefront with the state governments. The states are supposed to be steeped in "revdi culture" and distributing too many freebies risking financial stability. The Supreme Court of India has taken cognisance of the issue and is setting up a commission. A roaring debate is going on in the media.

But, to my surprise, everyone seems to have ignored that the existing FRBM Act already sets stringent fiscal limits on the freebies that a government can distribute.

Freebies, however one may define them, are a part of the revenue expenditure. A key provision of the FRBM Act is that the revenue deficit must be eliminated, which means no borrowed money can be used for revenue expenditure, including freebies.

On average, expenditure on salaries, pensions, and interest constitutes 50-55% of the total revenue expenditure of the states.

After other committed expenditures on social and economic development, the residual available for freebies would be very limited unless governments flout the condition of zero revenue deficit.

The key question is this: who has been performing in a fiscally responsible manner the states or the Union? In 2000-01, the combined revenue deficit of the Union and states had reached a dangerous level of 6.45% of GDP, the Union's deficit being 3.91% and the states' being 2.54%. After the FRBM acts, the deficit ratio tended to come down, and in 2010-11, the combined deficit was 3.20%, which was entirely the Union government's contribution. In 2010-11, the Union government's revenue deficit was 3.24%, while the state governments had a revenue surplus of -0.4%.