Budget shortfalls for the Centre and states caused by improper implementation of GST will complicate the formulation of the new budget
India budget exercise for fiscal 2020-21 is different this year, not only because our Prime Minister has involved himself in the exercise but also due to multiple new political and economic challenges that forced him to come into the picture. The focus is on avoiding a turbulent fiscal future by resorting to a realistic budget at the time when the economy is performing at a low growth rate of 4.8 per cent with a huge shortfall in revenue under a sweeping reform of GST, recommendations of 15th Finance Commission for revenue sharing with states which is binding on the government from fiscal 2020-21, mounting inflationary pressure, rising oil prices, distortion in the trade balance, deficit and the political unrest in most of the states which are now ruled by opposition parties depending largely on revenue sharing and grants-in-aid from the Centre.
Our country is not only the Centre but also the states and we have a federal structure. Before the implementation of GST, states had the power to raise taxes and the proceeds were used for their expenditure. At the midnight of July 1, 2017, state power to collect taxes was done away with, after the launch of GST. Since then our states were made dependent on a revenue share to be made available by the Centre, which they never get in time. It has resulted in worsening state finances. Under the authoritarian rule of the BJP led government at the Centre, barring a few, most of the states ruled by BJP or its alliance partners have kept their silence. The political situation since March 1918 has now been reversed. Barring a few, most of the states are now ruled by other political parties opposing tooth and nail, the authoritarian policies of the BJP led government of the Centre. States have become vociferous in their demand for timely transfer of revenue share, not only as per their share in the GST collection but also as per the commitment made by the Centre at the time of launching the GST to compensate the loss incurred by the state, if any, due to implementation of the new tax mechanism.
A huge shortfall in the tax-revenue this year has presented an unprecedented problem to meet even the requirement of the Centre. How can the Union government fulfil its commitment to revenue sharing to the states? This question haunts the budget makers because the share of states in the GST has considerably fallen and there is a commitment that revenue shares to the states will be set off against any loss to them.
Moreover, states are suffering from non-transfer of their share in time at a time when they are increasingly dependent on the sharing of central taxes and grants-in-aid. After Modi's coming to power, especially after taking over the power to tax under the GST regime, states are increasingly dependent on the mercy of the Centre. Only a few years ago, central tax share and grant in revenue receipt of the states was around 38 per cent which has risen to 47.75 per cent in the current fiscal period. This level of dependence is, of course, alarming and against the principle of economic federalism. It indirectly means that the performance of the states is increasingly dependent on the mercy of the Centre's transfer of funds in time. It is why most of the states are financially in bad shape.
Additionally, there is an issue of share in GST in which the most populous states will get most of the share and the least populous will get the least. It is indirectly penalising the states that have implemented the national population control programme more successfully. It goes without saying that southern states are to get a lesser share in GST for their performance, which has to be compensated otherwise.
One of the major problems with the Ministry of Finance this time is their setting of GST rates on their own initiative. Earlier, the government used to decide the rates of goods and services on their own whims and fancies. However, under the new GST regime, neither the states nor the Centre has the power to do so. The taxes are being decided by GST councils. This has limited the government's power of raising more tax revenue through goods and services for the majority of items, except for a few articles such as petroleum products. Therefore, to enhance the revenue, the officials are putting in great efforts to widen the tax bases, which is the only hope left for the government.
Fair distribution of the GST proceeds has additional difficulties due to the recommendation of the 15th Finance Commission submitted to the Centre last month and will be binding for the Centre from the year 2020-21. Its recommendation, therefore, impact the budget exercise. The actual recommendations will be known only after the presentation of the budget on February 1. The 14th Finance Commission had recommended 42 per cent to be transferred to states from Centre's divisible pool of taxes. Since the 15th Finance Commission has understandably calculated it with especial consideration for two new factors, the Census 2011 and the new GST regime, its recommendations have new bearings on the way the budget is being prepared. Any reduction in transfer will curtail the spending power of the states needed to discharge their constitutional responsibility on the one hand and the revenue shortfall tends to restrain the Union government to curtail their own expenditure on the other.
In this backdrop, worries are written large on faces of officials of the Finance ministry. Not only the Union government but the states have also been worried over their finances. People have high expectations from this budget because they have been greatly suffering from a severe economic crisis which is most likely to deepen further on account of a range of domestic and external crises. However, much will depend on the assumptions underlying GDP growth and revenue and expenditure projections for the next fiscal period. Even the GDP growth rate assumption at 8 per cent is being considered ambitious while actual performance is about 4.8 per cent in the current fiscal term but there was a dominant view in the ministry for making the budget on an assumption of a growth rate of 9.5 per cent.
Views expressed are strictly personal