Ideas, even when reformatory, need a fair and supportive structure in which they can be implemented.
As the collateral damage inflicted by the new database (MCA-21) in 2015 by the Modi government along with methodological changes for calculating the gross domestic product (GDP) of the country reveal themselves, one is aghast at the inequities it introduced into India’s federal structure, by hurting some states and favouring others.
This was probably not by intent but certainly courtesy inadequate homework before shifting from the “establishment approach to the enterprise approach”, which affected calculation of fiscal ratios. This has for long been pointed out by the redoubtable Professor Ravindra H. Dholakia, member of the monetary policy committee of the Reserve Bank of India, because at the receiving end of the change amongst the major state economies have been states such as Bihar and Bengal that are lower down the economic order, while southern states Karnataka and Kerala experience significant benefits along with the more prosperous state of Delhi.
Not that the bias is necessarily in favour of the prosperous states; it is just the luck of the draw vis-à-vis the rewritten norms for estimating the GDP and the gross state domestic product(GSDP) has led to this curious outcome of some states suddenly finding that their economies are now larger and, therefore, their borrowing limits higher too.
The Fiscal Responsibility and Budget Management Act limits state borrowings to three per cent of the GSDP. If the economies are now smaller, so will the borrowing limit be, as is the case for Bengal and Bihar. The new norms similarly impact the size of the resources that would devolve upon states.
As a recent analysis of the aggregate GSDP of states ~ common data for the old and news series available for financial years 2012-14 ~ reveals, not just did Bihar and West Bengal suffer a shrinkage of their economies, Madhya Pradesh, Rajasthan and Odisha too met similar fates, though Jharkhand and Assam were favourably impacted, while Haryana, Gujarat and Punjab, in the prosperous state category, were minimally favoured.
What cannot go down well with the losing states is that given the unavailability of state-level data in the early national accounts figures, state level estimates are being based on a proportion of all-India estimates. This means a particularly hapless position for a state like Gujarat, for example, where 74 per cent of the GSDP is derived from ad hoc allocations, leading to an approximation that is not quite reflective of the state’s economy.
Wiser counsel, to make relevant disaggregated information available to the MCA-21 before making the switch, was disregarded. Hopefully, the new government will review affairs and remove the distortion that affects the state budgets and also discrepancies between a state and the finance commission assessment of GSDPs.
Regrettably, the advisory council of the 15th Finance Commission that met recently has not seriously addressed the problem and, hopefully, the new finance commission will remedy this problem.