New Delhi: With the lack of any rigid fiscal constraints on the central government, it is more likely to take up populist schemes as compared to states which have more limited resources, said Y.V. Reddy, former Reserve Bank of India (RBI) governor and 14th Finance Commission chairman.
In an interview with ThePrint after the release of his book Indian Fiscal Federalism, Reddy pointed out that while states have no option but to stick to their fiscal deficit plans, the Centre can deviate from its fiscal consolidation roadmap as it has the power to print currency to bridge the deficit.
However, the former RBI governor added that this erodes the moral authority of the Centre vis-à-vis its dealings with the states.
The Modi government breached its budgeted fiscal deficit target of 3.3 per cent for 2018-19 and increased it marginally upwards to 3.4 per cent to allocate funds for its income support scheme for the farmers.
Populist schemes
Reddy said that states have to sacrifice expenses in some other areas if they announce populist schemes.
“But that is not the case for the Centre as it can print money. There is a greater danger of populist schemes being taken up by the Centre than by the states,” he said.
He added that “people are also becoming fairly aware of which promises will be kept and which will not be kept”.
Reddy’s comments come at a time when the election manifestos of political parties are promising many sops to the poor and the farmers.
Starting with a slew of farm loan waivers in states in the last two years to the Union government’s interim budget announcement of a Rs 6,000 annual income support to farmers to the Congress’s poll promise of a Rs 72,000-per-year cash transfer to India’s poor, populism is reaching new heights in these elections.
Also read: Modi’s cash plan better than farm loan waivers for short-term relief, says Raghuram Rajan
‘Need to win trust back’
Reddy also talked about the challenge before the 15th Finance Commission to regain the trust of the states, eroded by the terms of reference of the last commission that are heavily skewed in favour of the Centre.
The Finance Commission decides on the share of the divisible pool of taxes that will go to the states, and also determines the share of each state. Its recommendations are valid for a five-year period.
“For the first time, many chief ministers have expressed concerns about the terms of reference. The commission has to win back the trust of the chief ministers,” said Reddy.
“It is an award which has to be equally acceptable to all states. It is not about making the states happy or unhappy. If you are making the states unhappy, then the union should also be equally unhappy,” he added.
Reddy declined to comment on whether the relations between the Centre and the states have plunged to a new low under the Modi government.
Also read: Modi govt set to fall short of 2018-19 direct tax target of Rs 12 lakh crore by a distance
Soon those coloured pieces of paper become worthless. India has transitioned to a low inflation economy with great difficulty. That is a requirement for lower interest rates and growth. Also to protect the financial savings of households. Reckless advice should not be on offer.