A strategy forged from revenue deficit

THE story by my colleague, Subhash Rajta, in The Tribune earlier this week, about the Sukhvinder Singh Sukhu government in Himachal Pradesh buying 10 luxury cars for its use — even as the chief minister flew to Delhi to remonstrate with the powers-that-be over the 16th Finance Commission’s recommendation to withdraw Revenue Deficit Grants from states and encourage them to tighten their belts — has created an uproar.

People are legitimately asking why ministers and bureaucrats need to use fancy, new cars — literally, privilege the “lal batti” syndrome, hardly restricted just to the purchase of vehicles — when budgets for schools, buses, hospitals, etc are being cut. And why the Himachal government won’t take a leaf out of its own party’s reform book, launched back in the day in 1991 by then Prime Minister PV Narasimha Rao, ably assisted by Finance Minister Dr Manmohan Singh and Finance Secretary Montek Singh Ahluwalia — which not just helped change India but also gave Indians the confidence to take on the world. (Seems Sukhu has since met former finance minister P Chidambaram for a few tips.)

Certainly, with a projected revenue deficit of Rs 6,390 crore, or 2.5 per cent of the state’s GDP, Sukhu has a problem. But it’s not like Himachal is the only state falling short. Nor is it that spending money is a bad thing — we all know that splurging (as long as it doesn’t land you into a debt you can’t repay) helps the economy go round.

That’s why a key data point to measure how broke your state is not to look at bald figures, but what percentage of the state GDP (GSDP) is accounted for by its revenue deficit.

So Punjab’s projected revenue deficit, at Rs 23,957 crore, is a high 2.7 per cent of its state GDP. Tamil Nadu’s revenue deficit at Rs 41,635 crore is even higher, but a low 1.17 per cent of its state GDP. Kerala’s CPI(M) government — which devotes a large share of its pie to welfare schemes and has a population similar to Punjab — has a larger revenue deficit compared to Punjab, Rs 27,125 crore, but a lower GSDP, 1.9 per cent. Meanwhile Karnataka, one of India’s richest states, has a revenue deficit of Rs 19,262 crore, a mere 0.6 per cent of its GSDP.

You see the picture clearly. Tiny Himachal has done well on some parameters, like education, but is unable to raise revenues to fully fund itself. Much larger states like Tamil Nadu, on the other hand, even if they throw money on freebies — which Himachal is also accused of doing — are able to control their budgets because they are able to defray their expenditure with larger investments.

In fact, Tamil Nadu, which goes to the polls this year — along with Punjab and Himachal Pradesh in 2027 — has promised to bring down its revenue deficit even further. Both Punjab and Himachal, on the other hand, are staring at emptying coffers — and few ideas how to fill them.

Still, none of this is new. What has really set the cat among the pigeons these last few days is not the end of Revenue Deficit Grants announced by the 16th Finance Commission, led by the redoubtable economist Arvind Panagariya, but something far more important. The Commission has rewired the devolution of funds from the Centre to the states — as much as 41 per cent of the kitty — by adding a brand new criterion.

Which is, that the amount of funds a state gets from the Centre will henceforth depend upon how much it contributes to the national GDP.

There are two messages here. The first, that resilient and investor-friendly states like Tamil Nadu, Karnataka and Maharashtra will benefit; while states like Himachal Pradesh, whose capacity to earn is limited, will be hurt. The first question to ask, therefore, is what this does to Centre-State relations, which, traditionally, have been book-ended by notions of equity and a greater generosity for the underdog.

Under the new formula, the underdog will have to work much harder to haul itself out of the red.

Now go back to the data. It is fascinating to see that Himachal has actually got a greater share of funds from the 16th Finance Commission than the 15th. This also means that when Mr Sukhu screams blue murder because his state hasn’t got enough, the FinMin babus will rightfully point out that actually Himachal has — and that the Congress government must learn to do a better job of managing its finances. (Remember that Himachal goes to the polls in end-2027.)

The second message is equally interesting. States going to the polls over the next 12 months, like Tamil Nadu, Assam, Punjab, Kerala and West Bengal — with the exception of Bengal — have been allocated a larger share of funds than what they were by the 15th. With the exception of Assam, the remainder are all Opposition-ruled states.

Even more significant, large states like Bihar, Uttar Pradesh and Madhya Pradesh — all in the cow belt and all ruled by the BJP — have been given a lower share of taxes this time, as compared to last time.

Pure coincidence or pure strategy? Mr Panagariya will, of course, wager in favour of leaner, meaner and far less wasteful economies; he will argue that money has no colour, and so what if many of these states are ruled by Opposition parties.

But the message from Delhi, it seems, is quite different. Cow-belt states are being given shorter shrift because they are already in the BJP fold. Monies can be better used elsewhere, for example to woo states going to the polls soon.

We know that Punjab, like Himachal Pradesh, is fully on the BJP radar. Even if Kerala is a different kettle of fish, no harm feeding the fish — in fact, it has just bitten the bait in Thiruvananthapuram. Tamil Nadu is larger and a far more difficult pushover (and Karnataka must wait for 2028).

It’s clear the 16th Finance Commission has sown the seed. Now to water the plant and see how it blooms.