History will judge India’s leadership favourably for the swift lockdown imposed in March to curb COVID-19 as it saved lakhs of lives even though livelihoods suffered, Fifteenth Finance Commission chairperson N.K. Singh has said. In his autobiography Portraits of Power released on Monday, Mr. Singh, who once served as secretary to then Prime Minister Atal Bihari Vajpayee, gives readers a vivid overview of his brushes with the machinations of India’s political economy through the course of crucial economic reforms. Edited excerpts from an interview with The Hindu
In your book, you blame migrants’ woes after the lockdown partly on poor conduct from employers and corporate India, as well as State governments. Wouldn’t it have helped to have a little longer notice than a few hours for the lockdown?
I think the lockdown had to be taken with such alacrity and decisiveness that it did. And I think history will judge the leadership favourably, because our lockdown with 85% severity was the most effective lockdown. When people analyse retrospectively why our first quarter GDP was negative 23.9%, they will also consider the severity of our lockdown which was more than many other countries with much less severe and draconian lockdowns. So it may not have been that it saved livelihoods, but it certainly saved lakhs of lives, enabled authorities to prepare for ramping up health infrastructure to deal with the pandemic. Did corporate India fail migrants? Perhaps. Did urban India fail rural India? Perhaps. Did the employers fail their employees? Yes, by all means. Did some of the State governments not act with the necessary alacrity? Maybe. But the fact remains there were heart-rending scenes of migrants returning home. We hope that these will never be repeated.
Going forward, there is a need for a National Commission on Migration (NCM) — credible data remains elusive as also the definition of who is a genuine migrant. I was a member of the last U.N. Commission on Migration and we studied patterns all over. One of the patterns we saw was circular migration. Brain drain was a big concern for societies with fewer people with skills. As those people went away, the societies suffered. We also came across circular migration — Kerala has too many people from Bihar and U.P. and locals say they are altering the ethos of the State. I asked them — where are your labourers gone? There was uncomfortable silence as they had gone in search of better jobs maybe to the Middle East. So, someone needed to take up the jobs they left behind. Everyone is a gainer then, as the remittances helped the incomes of their families and the State domestic product. The kind of economic activity needed in the State continued because of labour from other States. Of course, there will be inevitable tension as happened during the pandemic when some of them went back home. The whole issue of migration needs attention, most importantly, from a cohesive national entity which goes into it. Some of it is currently handled by Labour Ministry, some by urban development… An NCM, in my view, would be an important initiative for the government to consider. The problems of migration may have abated for now, but remain a challenge.
In your book, you recall an episode where you conveyed a message to Prime Minister Manmohan Singh from Larry Summers, questioning the rationale of the retrospective taxation amendments moved by Finance Minister Pranab Mukherjee in the 2012-13 Budget. Now, the government is considering an appeal against Vodafone’s victory over that tax in international arbitration proceedings. What do you feel is the way forward?
The context is significant. I happened to be in Mexico for an international conference during their G20 presidency and an interactive session with Tony Blair and Larry Summers. He asked me for a favour. “For a long time, you guys in India have said the country believes in the rule of law. I don’t think you believe in it… could you carry a message to Prime Minister Manmohan Singh, that considering what you have done on retrospective taxation, this doesn’t measure up very well with India’s persistent assertion to investors that India believes in the rule of law.” So I did convey this to the PM, but Dr. Manmohan Singh being Dr. Manmohan Singh – an absolute conformist, in terms of rules, procedures, propriety and self-effacing characteristics — he asked me in return. “NK, you have also worked in the Finance Ministry for long. When a Finance Minister comes to you once, and you suggest to him that something should be rethought of, he goes and rethinks and comes back holding on to his view, do you think it is proper for any Prime Minister to interfere in the decision which must be left to the Finance Minister.” This is what he told me and the taxation law was implemented.
The current state of play is the case is in judicial process. This has revenue and other implications… I do not know if this is the only instance of retrospective taxation. More important than the case is the principle of retrospective taxation itself. When this issue had come up in Parliament too, I remember vividly that the Finance Minister had asked if the Parliament is sovereign and competent enough to enact laws and change them retrospectively. Of course, the answer is yes. Parliament is the final repository of all decisions and that’s how this Bill was passed at the time. I had a further opportunity to discuss this in the Public Accounts Committee, which had set up a group under my chairmanship to look at taxation issues. I had summoned the Finance Secretary to share the notings and considerations in the matter. After some adjournments, he did tell me that it looks as though legal opinion had been taken and Parliament was quite competent to make this change. The issue was not Parliamentary competence, but the rationale for making this far-reaching amendment.
That was history. On the future path, it’s up to the government to decide it. It is not merely about this particular case and its resolution, but the broader principle and framework which should govern retrospective taxation.
You have shared another anecdote about Dr. Singh asking you why Biharis do well outside the State, but Bihar itself remains poor. With the Bihar elections coming up, how do you view the development agenda for the State?
In the last book I edited with London School of Economics’ Nicholas Stern, Towards a New Bihar, we had all argued that the historical issue of Bihar has been the dynamic and the balance between identity politics and development politics. Society has remained far too long as a stratified social order, it is only development that can make that order more malleable. Therefore, it would be the quest and hope of every Bihari, that whatever the outcome of the forthcoming election, development should trump identity politics. I cannot wish away the fact that identity politics, in terms of class, caste and other fragmentation, exists. I very much hope that development will prevail because till that happens, society will remain stratified and horizontal, vertical mobility remains restricted.
One of the malaise of the State’s economy has been that private investment remains shy. Land is a very big issue due to the high man to land ratio. I don’t believe in the dominant philosophy there of enhancing public outlay in the belief that private capital will ride on the back of that. This view needs to be significantly modified… It is only synergy between public outlay and private capital that can guarantee long-term growth. Whatever government comes to power, I hope they can get more private investment into Bihar. It is also ironical that the 1991 economic reforms that were supposed to bring all-round benefits, the benefits of getting private capital into states that needed development, have been weak for the poorest of States. Bihar is perhaps at the rock bottom of per capita income compared to other progressive States like Haryana.
When Dr. Manmohan Singh asked me: “How is it that Biharis when they go outside the State, achieve spectacular success in every walk of life, but Bihar remains poor”. Then he laughed and said, “India can never prosper till Bihar prospers”. It was an ironic remark that was quite embedded in my mind. Later, for a particular period, Bihar’s growth was significantly higher than India’s growth rate. I told him then: “Now, Sir, India cannot prosper till it grows as fast as Bihar has been growing for the last three years.” He laughed. The message was not lost on him or me. I hope the new government of Bihar will continue to focus on important development initiates to bridge the gap between where Bihar is and where it must be. That’s the only way to boost Bihar’s per capita income. Look at the migratory patterns. Maximum outward migration is from Bihar and parts of U.P. These are also driven by factors like better opportunities. The State’s migratory issues need an analysis both on social and economic factors.
Is the Commission expected to have more meetings before submitting its report (expected this month)?
We will be having several meetings before submitting the report. Each word would have to be weighed carefully. This award will be from April 1, 2021 to April 1, 2026. So we have to be careful that the judgements we exercise in projecting figures on GDP, tax buoyancy are embedded in appropriate rationale.
Given the pressures on the fiscal front, is it a good time to revisit your 2018 recommendation while reviewing the fiscal responsibility framework, to set up a Fiscal Commission?
This is a problem that is strictly in the domain of the Finance Commission and we would be submitting our recommendations quite shortly. The Commission is yet to make its formal recommendations. The NDA was the first to have a Fiscal Responsibility and Budget Management (FRBM) Act in 2003 under the Vajpayee government. It took another NDA government under PM Narendra Modi and Finance Minister Arun Jaitley to set up a committee to review the fiscal law (chaired by Dr. Singh). I think that made two important departures — it gave a new path of fiscal deficit targets over the medium term, and introduced public debt as an important anchor towards the realisation of which fiscal deficit targets must be calibrated. Yes, looking at India’s per capita income and it’s a lower middle-income country, it was felt that debt to GDP of 60% over the medium term would keep us far away from any concerns of debt cliffs and it became the law in 2018. The question is what happens now?
Definitely, considering the expenditure pressures and the pandemic still has huge uncertainties, it would be sensible to suggest that this is a period of fiscal forbearance and not fiscal rectitude. Going ahead, the problem is I have to create a framework for the next five years and one big difference between 2018 and now, is that the FRBM Committee was primarily designed to look at the debt and fiscal target of the Centre. As far as the investing community is concerned, they are keen on the general government debt, the Centre and the States combined.
We are closely looking at the kind of flexibility and leeway that should be given to both the Union and the States. As a Finance Commission, one of our overriding priorities is that the Union and the States must be treated in an equal way. We have ensured that in our recommendations. I think a sensible course would be to introduce some flexibility both on the debt trajectory and the fiscal deficit both for the Centre and the States, ensuring that the new fiscal compact represents the partnership between the Union and States for the future.
Some say the fiscal compact between the Union and the States is already in trouble over the GST compensation tussle…
The last word on this important issue has not been said. Both the States and the Centre are recalibrating the contours of a consensus within the GST Council. It is for the Council to take such decisions. There are two-three things that are very evident, though. The Compensation Cess Act really ensures that the 14% revenue growth to States for five years was covered and any inability of the State to get that is to be met by the Compensation cess fund. With accruals to the cess fund not adequate to meet the shortfall, the issue is how are they to be met? Clearly, they cannot be met from the Consolidated Fund of India and it would be inappropriate. So it has to be raised through some borrowing arrangement like the present one. The only issue is the sequence of the borrowing. To Some extent, it doesn’t make much of a difference. What investors see is the debt of the general government, not the differentiated debt between the Centre and the States. So to some extent, this entire thing would be a shuffling of accounts. And I see there is now some forward movement. I have no doubt in my mind that the Union government would make sure that the period for which the cess is extended would be adequate enough to extinguish the liabilities which arise up to July 2022. This means that the cess may have to be continued up to a much later period, I think maybe in 2025-26. Any Finance Commission would calibrate that the revenues the State would receive would include the unpaid liabilities arising on account of the shortfall in GST. I think very frankly, there are a lot of misgivings about the fiscal compact having been broken, there is a trust deficit…. These may be somewhat exaggerated. First of all, there was no resiling or backtracking from the Central government on the obligations and liabilities themselves. At no point has the Centre said it will not pay for those five years. It’s only a question of how it can be adjusted in the most efficient way to undertake the borrowings.
So the Commission will be factoring these into its calculations?
It would be reasonable and rational for the FC to assume that since there is no suggestion whatsoever of any resiling of the obligations undertaken by the Central government, that these revenues (due) up to 2022 would not be extinguished but carried forward. And for the period of our award, we would naturally fully reckon and take this into account.
You have spent some time on the need to ramp up the health spending given the pandemic?
This has rightly been taken as a challenge but also an opportunity to carry out reforms from the unfinished agenda. You can argue if they are good enough. But there has been an attempt to bite the bullet on power, agriculture, health, education, Medical Council of India… a whole lot of reforms have been fast-forwarded from the background. Secondly, the inadequacy of the health infrastructure and the fact that historically, a very insignificant part of public outlay has gone to health sector. Not only in terms of the absolute amount of outlay — which is just about 1% of which States are doing 0.65%. States will have to do much more to take it to 0.8% as per the new National Health Policy of 2017. Finance Minister had said that the Central government’s outlay would also have to be increased. So raising the public outlay is one area. The second is the skewed nature of the outlay — the poorest of States have the poorest of infrastructure for understandable reasons. If you look at the overall divide across India, even at the lower end, the availability of beds, doctors and paramedics — is heavily distorted. So how do we repair this deficiency quickly because the pandemic has not really run its course. Thirdly, how do we get the panchayats to get quality primary health centres and district hospitals. Health expenditure needs to be assigned higher priority.
We have devoted a dedicated chapter to health in the Commission report, which goes into the question of how to reprioritise existing resources available more effectively to the third tier. And additional resources for which we will consider a sector-based initiative for health.
You have mentioned the need for a healthy financial system for long-term growth and alluded to the question of autonomy in banks and whether public sector banks have served their role?
There can be no two opinions — no large economy like India can really sustain a high-growth trajectory without a well-functioning financial system in terms of costs, quality and availability of efficient financial intermediation. It raises the broader issue of whether the nationalisation of banks done by Indira Gandhi has fulfilled its role. From a miniscule penetration in rural areas, which has certainly changed. Yet, access to credit remained rather weak till the PM’s initiatives on Jan Dhan accounts and DBT made banking more inclusive. Are these enough? Can there be a well-functioning autonomous banking system without revisiting the ownership structure? There is an ongoing public debate. Several measures have been taken by this government to improve banks’ autonomy. But the broader issue is the twin balance sheet problem — impaired balance sheets of banks, non-banking financial companies and corporates… what kind of ownership structure of the banks will serve the needs of a large economy’s growth? The timing of these changes should be carefully thought through. This is not the time to revisit the broader issue of ownership, with the pandemic to cope with. But yes, over time, it has to be considered if the banking nationalisation has served its utility.
