Mumbai, July 6: The 15th Finance Commission was asked to use the 2011 population census for deciding states’ share of central taxes. This may mean that states with higher populations will receive more central funds.
The decision has turned into a political controversy because it meant that the southern states — Tamil Nadu, Karnataka, Andhra Pradesh and Kerala — would see a fall in their share of central taxes. In these states, progressive health and education measures ensured the population fell four percentage points to 21 per cent of the national population in 2011 from 25 per cent in 1971. In comparison, the population of northern states — Uttar Pradesh, Bihar, Rajasthan and Madhya Pradesh — rose from 33 per cent in 1971 to 37 per cent in 2011.
T.M. Thomas Isaac, 66, Minister for Finance in Kerala’s Communist Party of India-Marxist (CPI-M)-led Left Democratic Front (LDF) government, has been campaigning against the decision ever since it was announced. He believes its implementation would lead to financial disruption in the states. He also warned of a political fallout.
Isaac is also upset with the implementation of the goods and services tax (GST). Though the collections are high, states have not benefited from the bounty, he said. In an interview with IndiaSpend, Isaac discusses all these concerns and more.
Q: Although you’ve maintained that Kerala, as a consumer state, would benefit from GST, you have also expressed dismay at its implementation and the tax returns that Kerala has been receiving. What is the precise problem?
A: Since the introduction of the e-way (electronic way) bill, our checkposts have not been functional, leading to leakage of inter-state trade. This has badly affected Kerala’s revenue where nearly 80 per cent of commodities are brought in from outside the state. The return form [to file GST returns] is yet to be finalised. The 3B form [filed by everyone registered under GST] is only a summary statement of the voluntary declaration by the merchant. There is no way that we can check the veracity of input credit as some of the data is not available. Further, in order to scrutinise data, we do not want the annual return [of GST] to be postponed any further. All of this is affecting the collection of GST. The benefits that we were expecting in terms of revenue are yet to come.
Q: What are the presumed benefits of the GST, and have these been realised yet?
A: Taxes have reduced sharply, but this is not reflected in the prices. Very few commodities have seen a reduction in prices. It was a gain for corporates, while ordinary people did not benefit as much. The small-scale sector was hit partly because their excise exemption had to be given up. Then, there are region-specific problems. The present GST does not permit any kind of regional independence. Everything must be confirmed by the GST Council. Overall, we are yet to accrue the benefits of the decisions. I’m optimistic that things will improve, but, so far it is gloomy.
Q: You had said the attempt to implement the Fiscal Responsibility and Budget Management (FRBM) Act — it seeks to set targets for the government to reduce fiscal deficits — without consulting states and the move to limit the borrowing power of states is a challenge to their financial independence. How do you foresee the future for state governments?
A: Many policymakers at the Centre seem to be obsessed with the country’s [credit] ratings. To improve the ratings, they want the fiscal deficit ratio to be reduced so that there is fund flow from outside. I believe that the state governments play an important role in development, especially in welfare and social and economic infrastructure. So, they [Centre] are taking the easy route by asking us to reduce the deficit. It is preposterous. We can’t accept that this must done for the benefit of some foreign power. This cannot be done by using the FRBM Act to bring down the fiscal deficit ratio. Since 2008, the Centre has a real deficit of around four per cent. Even if you consider it to be 3.5 per cent, it camouflages the figure. For example, the states deserve half of the estimated Rs 150,000 crore in the integrated GST. But they [Centre] have put it in their kitty to claim a lower fiscal deficit ratio. If they want to rein in states, why have state governments?
Q: The details of the 15th Finance Commission stated that the 2011 population census would be used to consider allocations. What do you think of this?
A: We are not against the Finance Commission. All we are demanding is that the it be allowed to perform its constitutional duty. The Centre must not micro-manage it or the details by adding [clauses] that tax devolution must be curtailed, borrowing power must be made conditional, etc. These are not aspects to be put here. Every state’s share cannot rise, no matter what formula is used. It will vary. Let us create a rule that this variation is contained in a narrow band such that the finances of the state are not disrupted.
At present, Kerala receives 2.5 per cent of the central tax revenue. It would receive less than two per cent if it is assumed that the 2011 population census is used. If there is mechanical acceptance of the details of the commission, there is a danger of [financial] disruption at the state level. We want to avoid it. I want to make it clear that we will not accept any decision that undermines the state’s fiscal domain… If anything of the nature happens, I am certain there will be a serious political fallout.
Q: The latest NITI Aayog health index has placed Kerala among the best performers. If the index is used to fix incentives from the Centre in terms of money, infrastructure, technology and so on to reduce last-mile development problems, do you fear that a top performing state like Kerala would lose out?
A: Some of the states are [performing] much above the national average. But these achievements have raised many second-generation problems which require expenditure intervention by the government. For example, due to universal education everyone aspires to receive quality education which demands huge state resources. We are seeing an increase in lifestyle diseases which require investments in speciality care.
Development does not mean that the expenditure requirements have reduced. At the same time, we must ensure that there is a minimum level of service across the country. No one can deny the need to transfer resources from developed regions to under-developed regions. I accept that. But, it must be done with a sense of proportion and must not disrupt the development process keeping in mind that it needs substantial resources.
Q: In your budget speech, you proposed resource mobilisation for a comprehensive healthcare scheme using lotteries run by the directorate. The revenue receipt for lotteries is Rs 11,110 crore (budget estimate for 2018-19) and expenditure, Rs 7,874 crore. Will the government utilise the profit to include all beneficiaries in the Rashtriya Swasthya Bima Yojana and the new National Health Protection Scheme (NHPS)?
A: From what I understand, all households will not be covered in the new NPHS programme. We want to cover those left out too. A proportion of the households in the state are covered by employee and pensioners health programmes while the rest must be brought under health coverage. We do not want to just use an insurance programme. In Kerala, the public health system’s very important. Unlike the rest of India, we have a wide chain of government-run hospitals where service is provided. We want to link this programme to our public health system to handle the demand.
We are investing close to Rs 5,000 crore in the health sector hiring doctors, nurses and paramedics to handle the demand that we foresee, including speciality health services. We intend to provide people access and assured treatment at accredited and government hospitals. This would require a substantial premium which will be provided through the lottery. The only justification for the lottery is that the profit will go into a social good. Through the lottery we are trying to tell people in Kerala that you can try your luck, but if you do not win, consider the investment a donation to the health sector. We expect to roll it out this financial year.
(In arrangement with IndiaSpend.org, a data-driven, non-profit, public interest journalism platform, with whom Shreehari Paliath is an analyst with IndiaSpend. The views expressed are those of IndiaSpend. Feedback at [email protected])