CM’s presentation before 15th Finance Commission

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Hon’ble Chief Minister Sri K. Chandrashekar Rao’s speech before the 15th Finance Commission:

Hon’ble Chairman of the Fifteenth Finance Commission, Sri N.K. Singh Ji, distinguished members of the Commission, Dr. Anoop Singh, Dr. Ashok Lahiri and Dr. Ramesh Chand, Secretary and Officials of the Commission, I have great pleasure in wholeheartedly welcoming you to Telangana on behalf of 3.7 crore people and on my own behalf.

Before presenting my views, I may briefly recapitulate the crisis like situation prevailing on all fronts at the time of the formation of the State. There were acute power shortages, high incidence of farmer suicides and the economy growing at below the national average. Many opportunities were lost and problems accumulated as a result of deliberate neglect of Telangana in the erstwhile State of Andhra Pradesh. We thought there was no point in brooding over the past neglect and be deterred by the challenges before us. We did not want such a serious crisis to go waste and took it as an opportunity to do things that were not done before to meet the suppressed aspirations of our people. We started the process of reinventing and reorienting the State to realize the goal of ‘Bangaru Telangana,’ i.e., Golden Telangana. We took up a number of programmes to alleviate the hardship of people and to put the Telangana economy on a higher growth trajectory.

We have submitted a detailed memorandum indicating the first of its kind initiatives taken by the State Government since its formation in June 2014 and presenting our views on the terms of reference of the Commission. My officials will be making presentations on some of these programmes. Therefore, I will restrict myself to a few important issues relating to the role of the Finance Commission in promoting cooperative fiscal federalism and making the States fiscally stronger.

At the time of the making of the Indian Constitution, the primary concern was preserving the unity of the country in the aftermath of the partition of the country and the problems associated with the integration of numerous princely and diverse States. Therefore, by design, the Indian Constitution was adopted with significant centripetal bias in the distribution of fiscal powers between the Centre and the States. Added to this, Centre has been increasingly intruding into State subjects by running numerous Centrally sponsored schemes, shifting subjects from the State list to the Concurrent list and introducing new schemes in State subjects without any prior consultation with States.

As per the assessment made by the Fourteenth Finance Commission, the Centre’s expenditure on State subjects increased from an average of 14 percent of its total expenditure to 20 percent and on subjects in the Concurrent List from an average of 13 percent to 17 percent between 2002-05 and 2005-11. This is indicative of the excess fiscal space available with the Centre, a major part of which can easily be shared with States through higher tax devolution. The Centre’s recourse to levy of cesses and surcharges on a permanent basis has significantly reduced the divisible pool of Central taxes, affecting the interests of States. Currently, cesses and surcharges account for 14.3 percent of the gross tax revenue of the Centre, even after some of the cesses are subsumed under GST. What is also a matter of great concern is that proceeds of Road Cess and Clean Energy Cess are not being passed on to States fully as repeatedly pointed out by C&AG. Short transfer of Road Cess amounted to Rs.72,726 crore and that of Clean Energy Cess to Rs.44,505 crore at the end of 2017-18.

With rich natural resources remaining untapped, people deprived of minimum needs, agriculture which supports over 50 per cent of the country’s population mired in distress, the time has come to take a comprehensive view of Union-State relations and to realign the resources in favour of the States, which are assigned functions touching on the lives of the people. Now the States are mature enough to formulate their plans and prioritize their expenditure to suit the needs of people being closer to them. States are found to be a lot more fiscally prudent than the Centre. The Gujarat and Kerala models of development were being talked about previously. Now, it is the Telangana model of development which has taken centre-stage.

The Cabinet Resolution setting up of the NITI Aayog generated hopes of building Team India making States equal partners in the nation’s development and promoting cooperative fiscal federalism. The Resolution also stated categorically that the one-size-fits all approach, inherent in Central planning and schemes have the potential of creating needless tensions and undermining the harmony needed for national effort. These hopes remained unfulfilled. The Hon’ble Prime Minister in his letter to Chief Ministers was categorical in stating that States should be allowed to chalk out their own programmes and schemes with greater financial strength and autonomy and expressed his strong conviction that strong States make a strong India and that the progress of the country depends on the progress of States. So far, no decisive steps have been initiated in fulfilling these commitments. I strongly believe that as a Constitutional institution for resource transfers to States, the Fifteenth Finance Commission has a decisive role in taking these imperatives forward and paving the way for path-breaking reforms in Indian fiscal federalism in consonance with changing realities.

The recent Finance Commissions have been assigning higher weightage to equity parameters like distance of per capita income in their tax devolution formula. We are not against preferential treatment to backward States. What we are worried about is that higher weightage to equity parameters has not served its purpose. Income inequalities across States have been increasing and the performing States are feeling discriminated. The Finance Commissions’ transfers are mostly restricted to the revenue account and for kick staring growth momentum in backward States, what is needed is a capital infusion. Therefore, there is a need for a separate institutional mechanism to support the capital needs of backward States outside the Finance Commission. We, therefore, strongly urge the Finance Commission to strike a balance between equity and efficiency in their dispensation so as to ensure that the performing States are not penalized.

Now, I will briefly present before you my views on some of the terms of reference given to the Commission, which are of great concern to us. The Commission has been asked to take into account the impact of the substantial increase in tax devolution recommended by the previous Commission coupled with the continuing imperative of national development agenda including New India-2022.

The tax devolution recommended by the previous Commission has not imposed any additional fiscal burden on the Union and the fiscal space of the Union remained the same but only resulted in a compositional shift in favour of tax devolution. The actual outcomes in the first three years of the award of the Fourteenth Commission indicate that the total revenue account transfers as percentage of gross revenue receipts of the Centre more or less remained the same as in the pre-award period. Taking into account the requirements for New India-2022 may result in reducing the fiscal transfers to States.

Following the recommendations of the Fourteenth Finance Commission, the Centre had dispensed with a number of programmes like BRGF, Model Schools and increased the matching contribution of States in respect of a number of Centrally sponsored schemes. Telangana suffered a double whammy with these developments and reduction of its share in tax devolution. I am confident that the Fifteenth Commission will adopt a judicious approach while dealing with these considerations and ensure a higher flow of resources to States taking into account the reality that the development of the nation lies in the development of States.

One of the considerations listed out in the ToR relates to the conditions that the Centre may impose while giving consent to States to raise loans. When the States are adhering to fiscal responsibility regime and containing their fiscal deficit at 3 per cent of GSDP and maintaining revenue balance, borrowings are obviously used for meeting capital expenditure. In such a situation, there does not seem to be any justification on the part of the Centre to think in terms of imposing conditions while giving consent to States to borrow.

In this context, I urge the Finance Commission to recommend continuation of the facility of additional borrowings over and above the 3 percent of GSDP limit to States which are fiscally prudent and have shown improvement in their own revenue collections. This will facilitate the States to put their ongoing projects on fast track and to reduce cost and time overruns. The Commission may consider raising the additional borrowing facility to 1 percent of GSDP.

The Fifteenth Commission has been asked to consider proposing measurable performance based incentives to States in a number of areas. I will only touch upon two areas. The inclusion of implementation of flagship programmes of Government of India and the exclusion of similar programmes of the State Government from the purview of incentive grants is a matter of serious concerns. The expenditure on flagship programmes of the Centre in a State is a miniscule of the total expenditure incurred by a State in a year. I request the Commission to incentivize the States in the implementation of their own flagship programmes which are much better designed than the one-size-fits all programmes of the Centre, most of which are in the State subjects.

Another performance based incentive relates to the control or lack of control in incurring expenditure on populist measures. There are no objective criteria to categorize schemes into populist and non-populist. India, being so vast and diverse, the needs differ from State to State and within a State from district to district. When the Government of Tamil Nadu introduced the Mid-day Meal Scheme, it was dubbed as a populist. Similarly, the Employment Guarantee Scheme launched by the Government of Maharashtra was criticized. The same schemes were later adopted by the Government of India. Similarly, the ‘Rythu Bandhu’ scheme launched by Telangana is being replicated in other States and recently, the Government of India too launched it covering the entire country, though in a much diluted manner. Therefore, the introduction of welfare schemes is better left to the States.

The Fifth Finance Commission expressed difficulties in taking a call on the propriety of policies of States and regulating grants based on any judgment regarding particular policies being adopted by individual States. I earnestly hope that this Commission too adopts a similar approach.

I would like to flag another important issue for the consideration of this Finance Commission. In the interests of tax harmonization, States have compromised their autonomy and extended unstinted support to the Centre in introducing GST. Sales tax/VAT, the only major source of own tax revenue of States has been subsumed under GST. Even after the Union excise duties and tax on services are subsumed under GST, the Centre is still left with buoyant sources of revenue like income tax, corporation tax and custom duties. While GST has subsumed around 31 of the gross tax revenue of the Centre, it has subsumed much larger portion of States’ own tax revenue of around 50 percent. As the States have sacrificed their fiscal autonomy, I request the Finance Commission to suitably compensate the States in the form of higher tax devolution.

The formula proposed by the State for tax devolution is primarily guided by the imperative to strike a balance between equity and efficiency. We cannot improve the lot of the backward States by pulling down the performing States. Taking into account the dire need to realign resources in favour of States and the fiscal autonomy foregone by States in the interests of tax harmonization, we request the Commission to increase tax devolution to 50 percent of the divisible pool of Central taxes. This can easily be accommodated by the Centre by reducing its expenditure on State subjects.

Let me also briefly highlight the State-specific requirements in a few important sectors. I will focus mainly on local bodies, Mission Bhagiratha and maintenance of lift irrigation projects. We have taken decisive steps to strengthen the local bodies and make them more accountable. We have enacted a new Panchayat Raj Act and increased the number of gram panchayats from 8,368 to 12,751. Similarly, the number of municipalities has gone up from 74 to 142. We request the Finance Commission to significantly increase grants to rural as well as urban local bodies. The need for such an increase has been elaborated in our memorandum.

The Government has been according utmost priority to provide irrigation facilities to 1.24 crore acres. In fulfillment of this objective, we have fast tracked a number of ongoing projects whose implementation remained neglected in the combined State. We have taken up the prestigious Kaleshwaram lift irrigation project to provide irrigation facilities to over 18 lakh acres in 13 districts of the State at an estimated cost of Rs.80,000 crore. Since the State is located on the upstream of the rivers Godavari and Krishna, there is hardly any scope for surface irrigation. Invariably, we have to depend on lift irrigation projects, which are maintenance intensive. The maintenance cost of the lift irrigation projects during the award period of the Fifteenth Finance Commission is estimated at Rs.40,169 crore. We request the Commission to support the State Government by recommending this amount as a maintenance grant.

As the Commission is aware, another prestigious programme taken up by the State is ‘Mission Bhagiratha’ to provide treated and piped drinking water to every household in the State. This will solve the recurring incidence of water borne diseases once and for all. The Mission is nearing completion in a few months from now. The maintenance cost of this Mission is estimated at Rs.10,142 crore in respect of rural component and Rs.2,580 crore for the urban component for the five-year period 2020-25. We request the Commission to provide a grant amounting to Rs.12,722 crore. We are making efforts to put in place a system of levying user charges but it will take time. Therefore, these grants are needed only in the initial five years. I am sure that the Finance Commission will support the State as these are first of its kind projects taken up anywhere in the country.

I am very confident that the Fifteenth Finance Commission under the dynamic and able leadership of Sri N.K. Singh Ji will herald a new era in Indian fiscal federalism, making the States fiscally stronger and thereby enabling them to tap the immense growth potential that the country is bestowed with and make it stand out as a strong and vibrant nation in the world. We are also confident that the Commission’s recommendations will pave the way for bringing about the realignment of resources with functional responsibilities.

I profusely thank the Commission for making it convenient to visit the State. I hope all of you will have a comfortable stay in this historic and hospitable city of Hyderabad.

Jai Hind

Broad National Interests-Concerns Shared by the Hon’ble Chief Minister Sri K. Chandrashekar Rao with the Hon’ble Chairman, Sri N.K. Singh and Members of the Fifteenth Finance Commission:

I will briefly share with you my concerns with regard to broad national interests, some of which may be outside the remit of the Finance Commission. The reason for sharing these concerns with you is that as an important and prominent Constitutional and expert body, you are better placed to flag these issues of national concern for the serious consideration of the Union Government. We are confident that your suggestions will have greater force in influencing the thinking of the Central Government.

  • As a nation, we need to introspect where we stand in comparison to many contemporary nations. I feel that piecemeal and half-hearted measures taken so far will not suffice. We have to make a paradigm shift in our institutional structure and official business processing. Let me cite some examples
  • India has 40 crore acres of arable land and 70,000 TMC of surface water is available. We can provide irrigation by traditional means alone to each acre of arable land with only 40,000 TMC of water in our country. By following efficient irrigation systems such as drip, sprinkler and piped irrigation, the task of universal irrigation could be achieved with much lesser quantity of water. Nature has provided us in a way, enough water that can meet the requirements of every acre of land
  • Despite several programs and schemes taken in the past, the fact is that only 5.5 crore acres (14%) of agricultural land is under canal irrigation. Several well-known factors namely, inter-State issues, legal hurdles, delays in land acquisition, rehabilitation and resettlement, poor project planning, and implementation are the main impediments for water sector projects
  • Inter-State River Water Dispute Tribunals, take decades to give their verdict. What a State can do with this kind of speed?
  • After the formation of Telangana in 2014, Government of India was requested to refer the matter of determining river water rights of newly formed State to the Tribunal under section 3 of Inter-State River Water Disputes Act, 1956. Even after the lapse of so many years, the matter has not been referred to the tribunal. This kind of apathy runs across the system and various sectors
  • Can a country afford to waste its resources due to inefficient individuals, institutions and processes when the immediate need is to maximise growth. In order to neutralize perverse incentives of individual Tribunals, the proposal to set up a permanent River Water Dispute Tribunal is under consideration by the Government of India for quite some time but without any tangible progress
  • If the legal process is time-consuming and insensitive to the national concerns, what about setting up an alternative dispute resolution mechanism for this purpose. The successive governments have failed to take any institutional initiative encouraging the States concerned to discuss the issues and come around to accept a mutually beneficial solution. In cases where such meditative and arbitration mechanism fail, one has to necessarily resort to legal recourse
  • At our level, we have tried to cross various hurdles. However, all of us have to join hands in this process. Soon after the formation of Telangana State, despite the absence of any institutional mechanism, we have successfully resolved our differences in water sector with Maharashtra and Karnataka. Kaleshwaram project is the living example of such negotiated agreements in the water sector
  • Another issue that I would like to highlight is unlimited, unbridled and unending litigation. Can we find a way to prevent frivolous PILs?
  • There are countries that were poorer than us but they have achieved remarkable growth by leveraging their economies to much greater extent
  • China has consistently maintained a high growth rate from 1979 onwards with very rapid growth from 1992 onwards continuously for more than 25 years. The GDP of China was less than that of India untill 1971. Now it is 4 times of India’s GDP. Why could we not do it? China’s stellar economic growth in the past 4 decades can be attributed to the proactive and visionary approach of its Government
  • East Asian Tigers like South Korea, Singapore and Taiwan and ASEAN countries like Malaysia, Indonesia, Thailand, Vietnam, Singapore, Philippines, etc., achieved miraculous growth. Japan rose from ashes to become a country with one of the highest per capita incomes in the world
  • Can’t we leverage the wealth and inner strength of our country and its economy? What is stopping us? It is not an insurmountable problem, but it is a mindset issue. The Country needs a new direction as 70 years have passed since independence and still, we are struggling for basic minimum needs. The Significant chunk of our people are still Jobless and poor. Let us not talk of ‘Best practices’… Let us think of ‘Next practices’
  • National agenda has to be changed and routine budgets year after year and usual methods and conventional thinking will not bring any big changes
  • We have to get rid of the poverty of thought and plan big instead of incremental thinking! Out of the box thinking is the need of the hour
  • If we have to develop India, we have to empower the States. Time has come for reinventing India by setting a development-centric national agenda and move away from centralization
  • India needs a new economic model that has States at the forefront. The Growth of the States is the growth of Country. At present, growth of the country is nothing but the growth of hardly 8 to 10 States in the country. Other States are much behind. If the country has to grow and achieve its potential each State has to grow duly leveraging its resources and potential
  • States need to be given more space to prioritise issues at their level. Even in the subjects listed under the State List, there are numerous Centrally sponsored schemes.
  • Even during Sarkaria Commission discussions, States proposed for the abolition of Concurrent List. States expressed the view that the Concurrent List has been operated by the Union in a monopolistic and unilateral manner as if it were a second Union List
  • On the subjects listed in the Concurrent List, most of the laws are made by Parliament like criminal law, forests, bankruptcy, trade unions, the welfare of labour, legal, medical and other professions, education, electricity, etc
  • Even some of the subjects which were earlier in the State List like education, forests, weights and measures, protection of wild animals and birds and administration of justice, were also brought to Concurrent List by 42nd Amendment Act of 1976, thus restricting the subjects of the States further
  • Sarkaria Commission recommended that in cases of proposed legislation on a subject in the Concurrent List, prior consultations may be held with State governments individually and collectively in the Inter-State Council
  • There is a need for the Central government to introspect and justify huge institutional structures. Agriculture, education, health, urban development, rural development, housing, drinking water, sanitation, and women and child welfare are subjects which are best left to be handled by State governments
  • Despite pruning several schemes, there are still a large number of Central sector and Centrally sponsored schemes and sub-schemes in subjects that should entirely be handled by States as per local priorities
  • Though there is a provision of devolution of 42 % of the Tax Revenue (GTR) of the Union, in actual terms, this has never been achieved. The devolved share has been only around a third of GTR. This is mainly due to the significant percentage of cesses in the GTR, which are outside the divisible pool
  • India needs economic reforms to improve the Ease of Doing Business, attract foreign investments, and resolve issues that hinder growth. For example, removing bottlenecks by improving container handling capacity and turn-around time at ports, improving average speed on National Highways and freight traffic on rail, reducing time to get customs clearance, etc., will improve business environment (In India average speed on highways is 50 Kms per hour compared to 80 Kms per hour in Japan and South Korea and 95 to 115 in the U.K. and the USA. In India, rail freight traffic moves at 24 km per hour whereas in countries like the USA, Japan and Australia, it is 80 Km per hour)
  • Our infrastructure status is far from satisfactory. If we have to grow faster, we need to improve our infrastructure significantly by spending at least 3- 4 % of GDP every year additionally in our infrastructure sector. (China had leveraged the credit from public sector banks to fund infrastructure. Many countries have more debt than their GDP: USA 105%, Japan 250% and Singapore 112%)
  • To achieve this, we need structural reforms for higher FDI inflows. These include developing SEZs like China, stable tax regime and no retrospective changes in laws
  • We also need to bring out an attractive and practical tax amnesty scheme for bringing black money to the country and to invest it in infrastructure
  • Amnesty scheme brought out in Indonesia in 2016-17 resulted in a disclosure of US $ 366 billion (Rs.24,00,000 crore). In another amnesty scheme in Italy in 2009, people declared the US $ 137 billion (Rs.9,79,550 crore)
  • Every Indian should be a proud taxpayer and partner in nation-building. He may voluntarily pay even if it is just 1 Rupee

Agriculture

  • Profitability and productivity in agriculture is low. There is a huge gap between farmers’ and consumers’ price. Farmers do not get enough income to take care of their families
  • Investment Support of Rs.10,000/- per acre (at Rs.5,000/- per crop per season for both Kharif and Rabi) as in Telangana will be a step in the right direction to address the distress in the sector
  • Increase MSP by Rs.500/- or 1/3rd more of existing MSP. Thereafter the MSP should be increased every year by linking it to the price index as in case of employees’ dearness allowance
  • Based on the agro-climatic advantage of each area, there should be area-wise crop colonies to grow specific crops
  • Connect NREGA with the agriculture sector to enable 50 % of labour payment from NREGS to increase profitability

Drinking water

  • Our government has shown that drinking water can be taken to each and every household through Mission Bhagiratha project
  • We should target to supply water to every village in the country within 5 to 6 years. It may cost about Rs 8 to 10 lakh crore

I am very confident that making the States fiscally stronger and thereby enabling them to tap the immense growth potential that the country is bestowed with will make our country stand out as a strong and vibrant nation in the world.

Jai Hind