NITI Aayog says devolution of funds to states should be based on performance indicators

NITI Aayog Vice Chairman Rajiv Kumar today pitched for building 'performance indicators' for the devolution of funds to states. Kumar also said that while fiscal irresponsibility is bad, "fiscal fetish" is also not desirable and a delicate balance has to be maintained. "I think it is clear that these (devolution of funds) criteria has to include some performance based criteria. And therefore those states which have done better in certain performance should not be punished. "...I think it is better deal now to start process of building some performance indicators for the devolution of funds and then increase it in phased manner," the NITI Aayog vice chairman said at an event organised by industry body CII.

Kumar's observations come in the backdrop of some states expressing disquiet about the Terms of Reference of the 15th Finance Commission to decide the sharing of tax resources between the Centre and states. The NITI Aayog was in favour of recommending to the 15th Finance Commission to consider Sustainable Development Goals (SDG) performance for allocating a small percentage of funds to different states, he said. But unfortunately they found that if the government uses SDG performance criteria for funds devolution to the states, "then it is the more backward states or populated states that will lose some of their allocations and that would be politically harmful", Kumar said.

Karnataka Agriculture Minister Krishna Byre Gowda had recently alleged that the Centre was playing politics over the Terms of Reference (ToR) of the 15th Finance Commission. He said ToR would lead to progressive states getting lesser allocation for the 2020-25 period. On the other hand, states that were lagging in governance and responsibility to deliver socio-economic services would be rewarded by grants, he argued. Andhra Pradesh Finance Minister Yanamala Ramakrishnudu had also recently objected to the terms and conditions set forth for the 15th Finance Commission for devolution of funds.

Finance ministers of all southern states would meet in Thiruvananthapuram on April 10 to discuss all these issues. The 15th Finance Commission had decided on the percentage of financial devolution and grants-in-aid, taking the 2011 census as the basis for central assistance.
The commission was constituted late last year under the chairmanship of N K Singh. Kumar also stressed that fiscal irresponsibility is bad but "fiscal fetish" is also not good and a balance must be maintained. He also pointed out that the country is entering a new era of much larger fiscal space because of the Goods and Services Tax (GST) and buoyancy in direct tax collection.

Kumar also appealed to the industry body to come up with new formula for enhancing growth. According to Kumar, macro-economic policy in India needs to be counter-cyclical. He said that while the Fiscal Responsibility and Budget Management Act did have a role to play in discouraging short-term populist measures and promoted fiscal discipline, there was also no need to be concerned about borrowing that finances long term capital expenditure. Kumar also pointed out that certain expenditures such as those for health and education could be viewed as capital expenditure as they promote productivity gains in the long run. In his address, Soumitra Dutta, Professor of Management and Former Dean, S C Johnson College of Business, Cornell University, highlighted that the Indian government's expenditure was rising faster than its income.

Over the past 40 years, India's expenditure was rising at the rate of 6 per cent per annum, while its income was rising by 4.6 per cent. He felt that there was a need to undertake deep structural reforms to correct this situation. He also said the best way to address this imbalance was to promote rapid industrial growth in the country.

Deepak Nayyar, Emeritus Professor of Economics, Jawaharlal Nehru University and former Vice Chancellor, University of Delhi stated that there was a need to downsize government to balance income and expenditure. He said that while the government would find it difficult to widen the tax base, the only option open to it was to cut expenditure and the only way to do that was to downsize the government.