New Delhi, India – Instantly after turning into the prime minister in 2014, Narendra Modi held backdoor negotiations with the Finance Fee of India to considerably minimize funds allotted to the nation’s states.
Nevertheless, the top of the fee, an unbiased constitutional physique deciding states’ shares from central taxes, resisted, and Modi needed to again off, new revelations present.
The Finance Fee’s agency stance pressured the Modi authorities to swiftly redo its maiden full price range in 48 hours and slash funding throughout welfare programmes since its assumption of retaining a higher portion of the central taxes didn’t pan out.
On the identical time, Modi falsely claimed in Parliament that he welcomed the Finance Fee’s suggestions on the tax parts to be allotted to the states.
These revelations of economic haggling and behind-the-scenes manoeuvring within the making of the federal price range got here from BVR Subrahmanyam, the CEO of the federal government think-tank NITI Aayog. As a joint secretary within the prime minister’s workplace, he was the liaison within the backdoor negotiations between Modi and the chairman of the Finance Fee, YV Reddy.
That is arguably the primary time a prime authorities official within the present Indian authorities has admitted publicly that the prime minister and his group had tried from the begin to squeeze the states’ funds, a priority now repeatedly raised by the states.
Subrahmanyam shared the data whereas talking as a panelist at a seminar on monetary reporting in India, which had been organised final yr by the non-governmental think-tank the Centre for Social and Financial Progress (CSEP).
In his remarks – one other first by a authorities official – he revealed how the federal budgets are “covered in layers and layers of attempt to cover the truth”. He added that he was “sure you will have a Hindenburg who will open up the [Indian government’s] accounts if they are transparent”.
He meant, if the accounts have been clear, the reality of the federal government’s fiscal situation would turn into evident, much like how the Adani Group’s questionable accounting practices have been highlighted by US-based brief vendor Hindenburg Analysis final yr.
These allegations of accounting fraud and different points by one in every of India’s largest enterprise conglomerates led to a $132bn market rout within the group’s valuation and have become a political sizzling potato because the airports-to-cooking oil conglomerate is perceived as being near the Modi authorities.
The Reporters’ Collective independently verified Subrahmanyam’s claims towards price range and different paperwork going again a decade.
At one level, Subrahmanyam even divulged particulars of economic embezzlement and fraud in a government-funded infrastructure venture, referring to it as a “funny case”.
Regardless of his headline-grabbing revelations, the seminar’s YouTube livestream has garnered little greater than 500 views. Hours after The Reporters’ Collective despatched detailed queries to the Prime Minister’s Workplace (PMO), public entry to the video of the seminar was minimize off on the CSEP YouTube channel.
Subrahmanyam, the Ministry of Finance and the PMO didn’t reply to The Reporters’ Collective’s detailed queries.
The Finance Fee scandal
Per India’s Structure, an unbiased Finance Fee, made up of economists and public finance specialists, decides what share of cash the federal authorities ought to share with the states from its tax collections, excluding these it labels as “cess” or “surcharges”.
The 14th Finance Fee was arrange in 2013. Across the identical time, Narendra Modi, because the chief minister of the state of Gujarat, was campaigning for the publish of prime minister and made information for asking the fee to offer states a 50 p.c share of central taxes.
In its report that it submitted in December 2014, the fee beneficial that states ought to get 42 p.c of the share of central taxes, up from the 32 p.c they’d been receiving till then. However Modi, now the prime minister, and his Ministry of Finance, needed to maintain the states’ share of taxes down at 33 p.c and a bigger portion for the federal authorities.
Beneath the constitutional provisions, the federal government has solely two choices: settle for the Finance Fee’s suggestions or reject them and set up a brand new fee. It can’t argue, debate or negotiate with it formally or informally.
However the prime minister tried off-record parleys to get the chairman of the Finance Fee, YV Reddy, who was earlier the governor of the Reserve Financial institution of India, to pare down his suggestions on the income share. In his feedback on the panel, Subrahmanyam mentioned he was the one different individual in that dialog.
This was in breach of constitutional propriety. If the federal government had succeeded, it might be capable to cut back the states’ earnings whereas passing the blame onto the constitutional physique, the fee.
Subrahmanyam mentioned {that a} “tripartite discussion between Dr Reddy, me and the prime minister” in regards to the determine befell.
“No Finance Ministry [official or minister],” he careworn, was concerned. “Should it be 42 [percent] or 32 [percent] or some number in between? The previous number was 32,” he mentioned, referring to the proportion share of taxes beneficial by the thirteenth Finance Fee.
The dialog lasted two hours, Sabrahmanyam mentioned, however Reddy was unyielding. Subrahmanyam recalled Reddy, telling him in “good south Indian English: ‘Appa [Brother], go and tell your boss [the prime minister] that he has no choice’.”
The federal government needed to settle for the Finance Fee’s suggestions of 42 p.c.
The Reporters’ Collective verified from an official who was a part of the 14th Finance Fee that there had been a delay in accepting the report and conversations about probably altering it. We corroborated it with one other economist who, at the moment, was working for the federal government and within the know in regards to the occasions.
“It was conveyed that the government had the power to reject the report but not ask for it to be altered. Only once in the past, the federal government has rejected the main report of a Finance Commission and even then it went with the dissenting note that was part of the report. It did not proffer its own devolution numbers,” mentioned the economist, who declined to be named because the discussions concerned the prime minister’s workplace.
However in Parliament, Modi hid his authorities’s failed try to cut back the states’ share of revenues. He instructed Parliament on February 27, 2015: “To strengthen the nation, we have to strengthen the states… There is a dispute among Finance Commission members. We could have taken advantage of that. We didn’t. But it is our commitment that states should be enriched, should be strengthened. We gave them 42 percent devolution.”
He added, “Some states would not have treasuries big enough to keep all this money,” as members of Modi’s ruling Bharatiya Janata Social gathering (BJP) laughed and applauded.
However with a smaller portion of the tax income, the federal government needed to rehash your complete price range and ended up slashing allocations for a number of welfare schemes.
“The budget was written in two days that year. Two days because this recommendation is accepted so late, so late and everything was written at that time … in a conference room in NITI Aayog. Four of us sat and actually recast the entire budget,” Subrahmanyam recounted.
“I still remember when we were cutting off … women and child – state subject – 36,000, make it 18,000 crores,” he mentioned in his speech, recounting how he and three different unnamed officers halved the allocation from 360 billion rupees ($5.8bn) to 180 billion rupees ($2.9bn) for the central Ministry of Ladies and Youngster Growth, which runs welfare schemes like delivering sizzling cooked meals to youngsters, pregnant ladies and lactating moms.
Whereas the numbers he rattled off weren’t exact, the federal government did considerably minimize allocations by practically half from 211 billion rupees ($3.4bn) within the price range for the monetary yr ending March 2015 to 102 billion rupees ($1.6bn) the following yr after it needed to settle for the upper proportion of cost to the states.
The price range additionally noticed an 18.4 p.c minimize in allocation for varsity training from the earlier yr.
‘Attempt to cover the truth’
Subrahmanyam’s candid remarks stand out all of the extra as a result of it’s fairly uncommon for presidency officers, significantly within the Modi administration, to be so forthcoming.
Talking on the panel on fiscal transparency – how truthfully the federal government lays out its revenues and liabilities – Subrahmanyam mentioned it might take a “Hindenburg” to delve into the nation’s accounts. A chuckle of acknowledgement rippled throughout the convention room.
The federal price range is “covered in layers and layers of attempt to cover the truth”, he mentioned. Evaluation of budgets by the likes of JPMorgan and Citibank “actually unveils the truth in what the real situation is”, he mentioned, referring to how overseas banks and traders are extra sincere than home gamers of their analyses of the Indian authorities’s accounts.
Subrahmanyam added that the budgets of the states and federal authorities have been untrustworthy as governments at each ranges have been utilizing accounting tips and generally plain fraud to keep away from revealing the degrees of debt.
One of many key considerations of home and worldwide traders is the extent of fiscal deficit the federal government carries at any given time – how a lot it’s spending in extra of what it earns from taxes and different revenues, by way of borrowings. In different phrases, dwelling past its means. Unhealthy ranges of fiscal deficit scare away traders and might result in a unfavorable cascading impact on the economic system.
Governments, subsequently, strive accounting tips to satisfy their bills from borrowings that may be stored out of price range paperwork, higher generally known as “off-budget borrowing”.
Indian governments of all hues have been criticised previously for doing this. These, merely put, are loans, often taken by the likes of government-owned corporations, which aren’t mirrored in authorities accounts, despite the fact that, finally, it’s the authorities that has to repay these loans.
In its fiscal yr 2019-20 price range, the federal authorities introduced that going ahead, it might disclose all such off-budget borrowings. This got here on the heels of criticism from the fifteenth Finance Fee towards the rise in such borrowings.
It did disclose higher than it had to this point, however as Subrahmanyam admitted, it was not sufficient.
“It is disclosing only one part,” he identified in his speech, referring to the federal government’s assertion on extra-budgetary sources. “What is the time of the borrowing, amount of borrowing, timeline of the borrowing, interest rate? Nothing is known.”
A report on the federal authorities’s funds by the nation’s comptroller and auditor normal, uncovered a few of these deficiencies in 2022. It, as an example, didn’t disclose the greater than 1.69 trillion rupees ($21.9bn) raised by totally different government-owned our bodies, which ought to have been a part of the price range assertion on extra-budgetary sources.
In his feedback, Subrahmanyam additionally delved right into a case of economic misconduct in a government-funded infrastructure venture within the erstwhile state of Jammu and Kashmir when it was underneath the direct management of the federal BJP authorities.
“We had a funny case,” he mentioned and narrated how the Jammu and Kashmir administration, on the time underneath the direct management of the federal BJP authorities, submitted a “fake UC”. This referred to utilisation certificates, the official doc certifying that funds have been used for the aim for which they have been disbursed.
The federal authorities sends funds to states for infrastructure tasks in tranches. The cash for every subsequent tranche is launched after the state sends a certificates that it has used the earlier tranche for the suitable functions.
“The second instalment came in. The contractor who has taken the first instalment, nobody knew how to pay him. Because the first instalment technically is consumed and the second has come up,” he added.
In different phrases, primarily based on the faux utilisation certificates that had been submitted, the federal authorities despatched the second tranche of funds. However now, the Jammu and Kashmir administration was caught with it. It had misused the primary instalment of funds and it couldn’t afford to pay the contractor partially.
The Reporters’ Collective didn’t obtain a response from Subrahmanyam and the Finance Ministry on detailed queries concerning the legality of this apply.
Cesspool of surcharges
As soon as the Modi authorities discovered it couldn’t cut back the state’s share of taxes by getting the Finance Fee to alter its report, it exploited an previous accounting manoeuvre that persists to today. The federal authorities steadily elevated the gathering of a category of taxes referred to as cess and surcharges. States will not be entitled to any portion of this.
“There is an increasing use of cesses and surcharges to fund or to raise revenues,” Subrahmanyam mentioned in his speech.
The quantity of cess and surcharges collected by the federal authorities underneath Narendra Modi has grown since 2015, information exhibits.
The share of cesses and surcharges stood at 10.4 p.c of whole taxes collected in 2011-12 by the Congress-led federal authorities. Between 2017-18 and 2021-22, the overall cess and surcharge collected by the federal authorities greater than doubled, from 2.66 trillion rupees ($33.7bn) to 4.99 trillion rupees ($64.8bn). Throughout that interval, cesses and surcharges rose from 13.9 p.c to 18.4 p.c as a share of gross tax income.
Malini Chakravarti of the unbiased think-tank Centre for Price range and Governance Accountability writes in regards to the tips the BJP authorities deployed to up its share of monies at the price of the states: “In the 2017-18 budget while the Centre reduced the tax rate of incomes up to Rs 500,000 [$7,400] from 10 percent to 5 percent, it levied a surcharge on incomes above Rs 5 million [$74,600] to counter the resultant revenue loss. Similarly, in the 2018–19 budget even while excise duty on petrol was reduced by Rs 9 [$0.12] per litre, the road cess was increased by an equivalent amount.”
Referring to the rise in cesses and surcharges, Subrahmanyam mentioned: “So, if that is the case and these are part of the non-divisible pool, then states would be wary of ceding more and more of their autonomy in taxation.”
One such manner the Modi authorities eroded the state’s tax sources was by way of a nationwide items and providers tax (GST), which was launched in July 2017 after years of political haggling. It was speculated to create a single market, changing a plethora of native taxes with nationwide ones. However “states are being increasingly choked for revenue,” Subrahmanyam mentioned, echoing a priority that has beforehand been voiced by opposition-ruled state governments.
Analysis papers within the current previous have proven that state tax revenues post-GST have declined when put next with the pre-GST interval.
A January 2023 paper by researchers on the Nationwide Institute of Public Finance and Coverage analysed state revenues and located that in 17 out of 18 states they reviewed, the income that states generated by way of state-level taxes declined within the post-GST interval in contrast with the pre-GST interval when seen as a share of the gross state home product (GSDP).
The federal authorities’s continued makes an attempt to limit states’ monetary independence additionally confirmed up when it arrange the fifteenth Finance Fee in 2017 and tasked it with recommending fiscal sticks and carrots to persuade states to keep away from “populist measures”.
In the identical vein, Modi, since mid-2022, has been accusing opposition-governed states of indulging in a “revdi culture” referring to conventional sweetmeats and disparagingly likening welfare schemes to distributing sweets or freebies to individuals.
In his feedback on the panel, Subrahmanyam differed together with his boss on the matter.
“The question is these are social decisions. Somebody can say that Medicare and Medicaid in the US are freebies. Can you go and scrap them?” he requested. “I think these are societal decisions, these are not economic decisions. Economics will only decide whether you can pay for it and do it or not. It cannot say it is right or wrong. It is a political decision.”
Shreegireesh Jalihal and Nitin Sethi are members of The Reporters’ Collective, a not-for-profit investigative journalism outfit.