We proposed a paradigm shift in fiscal management: N.K. Singh

N.K. Singh on the importance of FRBM panel’s recommendations on the fiscal deficit target of 2.5% by FY23 and increasing importance of states as stakeholders

Nand Kishore Singh has served in various capacities including as a member of Parliament in the Rajya Sabha and more recently as chairman of the Fiscal Responsibility and Budget Management (FRBM) Committee, which submitted its report to the government ahead of the presentation of this year’s budget.

ALSO READ: N.K. Singh committee recommends 2.5% fiscal deficit target by FY23

Hours after the government made the report public on Wednesday, Singh spoke to Mint on the sidelines of an India Conference in Chubu 2017 being held in Nagoya, Japan. He dwelled on the importance of the panel’s recommendations, the paradigm shift in fiscal management it ordained and the increasing importance of states as stakeholders. Edited excerpts:

Does this mark a paradigm shift in fiscal management?

I didn’t want to put it exactly like this, but yes it is. The report needs to be seen as the broad architecture to move the country towards a new fiscal era.

Why so?

For three reasons. First, I think that we have changed over from excessive preoccupation with fiscal deficit to debt becoming the principal anchor. The rest of the world, particularly rating agencies repeatedly pointed out to us that we look at issues of debt; and India was not only misaligned on its fiscal methods, it is fully misaligned on its debt. This will be one of the factors that will contribute to India’s improved credit rating. We have studied this in detail and specified that the optimum debt-to-GDP (gross domestic product) ratio is 60%.

ALSO READ: Why deteriorating state finances should worry us

Second, we are suggesting institutional changes. Earlier the administration of the FRBM Act was entirely in the domain of the government and did not have the analytical inputs of a robust independent organisation, like many countries have, of a fiscal council—which does fiscal analysis round the year and keeps the government informed in case it needs to undertake corrective action. It also firewalls the decisions by bringing in greater analytical rigour whether conditions are appropriate for triggering of the escape clause.

Third, the architecture of the new regime is embedded in a new and revised legislation which repeals the existing FRBM legislation.

When you say debt, you include even external debt?

Yes. It includes total debt. By the way external debt is not a big worry.

What is the present size of the debt-to-GDP ratio?

It is closer to about 68%. And this needs to be brought down to 60%.

How much will that be?

Today about 1% of GDP is about Rs175,000 crore. So that will make the target eight times of this—and this is a huge number. Achieving this will be a significant challenge, but this is entirely possible.

Are there any assumptions underlying your math?

One assumption is that we have assumed a nominal GDP growth of 11.5%. The other is that inflation will remain in the range of 4%. If both these variables change then the path will have to be recalibrated.

You have opted against prescribing a band for the new fiscal metric?

In most countries which have robust Parliamentary systems, if you give a range there is a tendency to operate on the upper bound. So what we have done is give fixed targets consistent with the meeting of the debt-to-GDP target of 60% by the year 2023; and the fiscal deficit for each year has been calibrated to achieve this metric. So there is a glide path in that direction.

When and how will the escape clauses get triggered?

We have prescribed a procedure such that this is not routinely invoked.

So, who has to undertake a bulk of the adjustment—the centre or the states?

As of now, it will be easier for the central government to achieve the target.

How will the proposed Fiscal Council work and what is the need for it?

We got presentations made on the best international experience on what has been loosely defined as second generation fiscal rules. One of the centrepiece is not escape clauses that most countries have but a Fiscal Council to do continuing analytical work on fiscal behaviour, acting in an advisory role to the ministry of finance and also of being available to the government to determine of the conditions were really appropriate for invocation of some of the trigger clauses.

Will states be a key player in the emerging federal polity?

There is no doubt about that. People do not look at disaggregated debt of the centre and the states. Investors, ratings agencies look to debt for the country as a whole. States have become very important players. You now have a very good overall symmetry—you have the Monetary Policy Committee and if you do have a Fiscal Council, you could perhaps see greater congruence between monetary and fiscal policy.

The current state of finances of the states, hardly warrants optimism to the future scenario you are laying out as responsible stakeholders.

The issue of state governments managing their finances will deserve very serious attention and priority action. How this say balancing is to be done is something that the next finance commission should devote attention. I do believe that the finance commission could consider an interim report.

How do you play farm loan waiver in this context? It is becoming a phenomenon.

If the obligation for the farm loan waiver is with the state governments, the central government has next to nothing to do with it. But it does impact the move towards 60% debt cap and therefore requires close monitoring and caution to ensure that overall trajectory that has been articulated by the FM (finance minister) does not get misaligned. But let us not exaggerate the issue.

Why deteriorating state finances should worry us

The increase in deficit will limit the benefits of fiscal consolidation by the central government

“I think it undermines an honest credit culture…overall government borrowing goes up, yields on government bonds also are impacted. Thereafter, it can also lead to the crowding out of private borrowers as higher government borrowing can lead to an increase in cost of borrowing for others,” said Reserve Bank of India (RBI) governor Urjit Patel when asked about farm-loan waivers in the post-monetary policy press conference last week. Patel further suggested that a consensus should be created so that loan-waiver promises are avoided, as sub-sovereign fiscal challenges can affect the national balance sheet. The comment should be seen in the context of the recent farm-loan waiver announced by the new Uttar Pradesh (UP) government. Similar demands are being raised in various other states.

Loan waivers will affect state government finances by increasing the deficit and worsening the quality of expenditure. For instance, the UP government has announced that it will issue bonds to fund the loan waiver. Even though the actual impact will be known after the state government presents the budget, its present and future liability is bound to go up. The possibility of implementation of loan waivers in other states such as Maharashtra and Punjab will have similar implications, and will have a bearing on the national balance sheet. Even though finance minister Arun Jaitley has said that the fiscal onus of loan waivers will be on states, it should worry the Central government as the chances of a credit-rating upgrade will diminish.

Since state governments at the aggregate level account for about 60% of total government expenditure, maintaining fiscal discipline and quality of spending at the state level is becoming increasingly important. The implementation of the fiscal responsibility and budget management (FRBM) rules in the last decade helped state governments improve their fiscal performance significantly. According to the numbers compiled by the Fourteenth Finance Commission (FFC), debt to gross domestic product (GDP) ratio for states at the aggregate level came down from 31.1% in 2004-05 to 21% in 2014-15. The gross fiscal deficit also came down from the level of 3.3% of GDP to 2.4% of GDP during the same period. An analysis of state government finances published by the RBI last year showed that even as revenue expenditure continues to dominate state government budgets, there has been an improvement in the quality of expenditure.

However, fiscal adjustments made over the years at the state level are now getting reversed to some extent. A new report prepared by the economists at HSBC—which analysed the budgets of 16 large states, making up about 85% of the Indian economy—shows that states at the aggregate level clocked a fiscal deficit of 2.8% of GDP in the financial year 2017 compared to the target of 2.6% set at the beginning of the year—largely because of a rise in current expenditure. The report expects the deficit to remain elevated in the current year as well. Factors such as rise in wage bill and under-provisioning of interest payment for Ujwal DISCOM Assurance Yojana (UDAY) bonds are likely to affect the final outcome. Farm-loan waivers in different states will further increase the risk of slippage.

There are at least two big reasons why state budgets deserve far more attention than they currently get.

First, even though the state deficit remains under the FRBM target, the increase in deficit will limit the benefits of fiscal consolidation by the Central government. India’s general government deficit is one of the highest among its peers and an increase in state deficit will make the overall consolidation difficult. Elevated fiscal deficit and higher borrowing affect interest rates in the financial market and crowd out private investment. The new fiscal rules recommended by the FRBM review committee aim to bring down the total debt to GDP ratio to 60% by 2023, from the present level of about 67%. This will require fiscal discipline both at the state and Central levels. The spread between state government and Central government bonds has increased in the recent period and should work as a deterrent against populist spending.

Second, since the states account for a higher share of government expenditure, deterioration in the quality of spending will affect growth prospects. Also, as the states’ share in Union tax revenues has been increased from 32% to 42% in line with the recommendations of the FFC, it has become more important for the states to spend wisely and focus on capacity creation that will augment growth in the long run.

Fiscal discipline both at the Centre and states will help strengthen the national balance sheet. It is vital that states don’t end up undoing all their hard work in terms of balancing the books over the years. For now, it is important that state governments avoid competitive populism.

Are state government finances becoming increasingly important? 

New India, different China

Chinese reaction to the Dalai Lama visit to Tawang this time varied in tone and tenor from previous occasions. There are reasons for that

Global Times, one of the most influential media organs in China, carried a provocative editorial on India last week in which it asked the rhetorical question: Is India capable of withstanding a “geopolitical” onslaught from an economically and militarily stronger China?

“With a GDP several times higher than that of India, military capabilities that can reach the Indian Ocean and having good relations with India’s peripheral nations, coupled with the fact that India’s turbulent northern state borders China, if China engages in a geopolitical game with India, will Beijing lose to New Delhi?” it asked mockingly.

The provocation was the visit of His Holiness the Dalai Lama to Tawang in Arunachal Pradesh. The Dalai Lama’s visit was purely religious and spiritual. He has himself clarified that the visit was a routine one like the ones he had undertaken to that state on six earlier occasions. He restricts himself to preaching and sermons most of the time during such visits and occasionally participates in other events. Even in such secular programmes, the Dalai Lama’s discourses are usually on universal wisdom and the greatness of the ancient Indian knowledge systems, etc. He hardly raises political issues, much less the happenings in Tibet or China.

Yet, every time he has visited Arunachal Pradesh, the Chinese media has reacted. Even the visits of other Indian leaders have attracted the umbrage of the Chinese. Whether it was President Pratibha Patil’s visit or that of Prime Minister Manmohan Singh subsequently, they attracted criticism of varying degrees from the Chinese side. The Indian side also routinely rubbished the criticism as unwarranted interference in the internal affairs of our country.

But there is a difference in the Chinese reaction this time round. It was more aggressive; almost bordering on an open threat. It not only talked about the superior military and economic strength of China, but also issued a veiled warning about the situation in J&K.

One important reason could be the tussle over who the next Dalai Lama would be. The Chinese have already installed their own Panchen Lama, who is regarded as next only to the Dalai Lama in the Tibetan spiritual hierarchy. His Holiness the 14th Dalai Lama is at an advanced age. As per the Tibetan Buddhist tradition, indications about the next Dalai Lama would be left behind by the present one. The 14th Dalai Lama has so far not given any clear indication about the next one. He has fleetingly made statements like “the next Dalai Lama could be a woman” or “the Tibetans have to decide about the future of this institution of Dalai Lama”.

But the Chinese seem to have their own worries about the matter. They seem to especially suspect that the Holiness might choose someone from India, or even from Arunachal Pradesh, as his successor, thus leaving the movement for Tibetan independence with another leader. There were occasional suggestions that China is contemplating declaring the next Dalai Lama, which have been rubbished by the Holiness himself. He has categorically stated that China can’t do another Panchen Lama with the Dalai Lama.

The other reason could be its territorial claims over Arunachal Pradesh. Here, it needs to be mentioned that Chinese territorial claims over Arunachal Pradesh are of recent origin. During the 1962 war, Chinese troops had annexed half of what used to be called NEFA in those days. Their troops had reached up to Tezpur. New Delhi had almost concluded that Assam fell to them. Nehru infamously delivered a radio address to the people of Assam, bidding farewell to them.

But then the Chinese side announced unilateral ceasefire on November 21, 1962. Surprisingly, they decided to stay put in the areas they had annexed in the western sector in Ladakh, but withdrew to the pre-1962 positions in the eastern sector. Thus, instead of annexing Assam, the Chinese troops vacated all of western Arunachal Pradesh, including Tawang. This decision of Mao became controversial in China; many believed that Mao was wrong.

Arunachal Pradesh became disputed in Chinese eyes only after the formal joining of Sikkim in the Indian Union in 1975. The Chinese side started raising the status of Arunachal Pradesh regularly since 1978. They have invented claims as far-fetched and fantastic as the Chinese people having the graves of their forefathers in Arunachal Pradesh and they would wish to have that territory as part of their motherland.

But the Chinese reaction in 2017 is markedly different in tone from previous occasions. I am reminded of the term “Finlandisation”, coined by the German political scientist Richard Lowenthal in 1961. In the aftermath of the Second World War, Finland chose to follow a policy of not standing up to the Soviet Union militarily or economically, even while the country had remained a part of Allied Western Europe. “Finlandisation” has become a pejorative of sorts that entails a gloomy prospect of a future “when West European nations may discover themselves militarily surrounded, economically beleaguered and psychologically isolated, having to draw the consequences”, as Walter Hahn put it.

The Indian response thus far has been on the lines of Finlandisation, a classic example narrated by a senior Indian columnist recently: “In 2009, largely unnoticed by the Indian media, China and India had drifted close to war over the Dalai Lama’s proposed visit to open a hospital in Tawang town. Conflict was averted when Prime Minister Manmohan Singh readily acceded to a request by Premier Wen Jiabao at an APEC meeting in Hua Hin, Thailand, to keep the international media out of Tawang and prevent it from giving the visit international significance.”

Probably the Chinese feel that India is coming out of this Finlandisation under Prime Minister Narendra Modi, and hence, the serious warning.

Scientists detect signs of life below world’s deepest point

Scientists have discovered potential evidence of life 10 kilometres below the sea floor in the Mariana Trench — the deepest part of the world’s oceans

Scientists have discovered potential evidence of life ten kilometres below the sea floor in the Mariana Trench — the deepest part of the world’s oceans.

Researchers, including those from Utrecht University in the Netherlands, ventured to Mariana Trench located in the western Pacific Ocean. They used Remotely Operated Vehicles (ROV) to extract about 46 samples of serpentine from the ocean floor near the South Chamorro mud volcano, which they brought back to their lab for study.
Serpentine is a mineral that forms when olivine in the upper mantle meets water pushed up from a subduction zone, researchers said. Such reactions produce methane gas and hydrogen, which could be used as a food source by microbes, researchers added.
Serpentine is pushed to the surface of the sea floor by hydrothermal vents, where the researchers found it.
They found trace amounts of organic material that was very similar to that produced by microbes living in more accessible places, the ‘Phys.org’ reported.
It is possible that the serpentine samples are evidence of life living far below the surface, researchers said.
The team used data from prior studies to calculate how far below the sea floor the serpentine was formed, which allowed them to estimate that the possible microbes might live — about ten kilometres below the sea floor.
The study was published in the journal Proceedings of the National Academy of Sciences.

The role of states in foreign policy

While staying firm on core national interests, New Delhi needs to give the states greater freedom to pursue cross-border economic partnerships

The Prime Minister of Bangladesh, Sheikh Hasina, completed a successful four-day visit to India on Monday. What remained unaccomplished, however, was the conclusion of the Teesta water-sharing agreement. The governments in both New Delhi and Dhaka are on the same page but the deal has been held up due to the intransigence of Mamata Banerjee’s West Bengal government. During Hasina’s visit, Indian Prime Minister Narendra Modi asserted that his and Hasina’s governments “can and will find an early solution to Teesta water sharing”.

Despite remarkable progress in bilateral relations with the finalization of the land and maritime boundary in the last three years, the unfinished Teesta business has become the touchstone for the bilateral relationship. Speaking at an event in New Delhi, Hasina guaranteed that once the water-sharing deal was concluded, “the face of Indo-Bangladesh relations would undergo another transformation”. On her discussions with Banerjee, Hasina added, in a lighter vein: “We had asked for water but she is giving us electricity. At least we got something.” The question here is: Do individual states have a veto in matters of foreign policy?
In an recent interview to The Hindu, the former high commissioner of Bangladesh to India, Tariq Karim, blamed India’s cooperative federalism for the lack of progress on the water-sharing issue. He advocated that the principle of collaborative sub-regionalism should trump cooperative federalism. A reasonable argument can indeed be made that cooperative federalism in this instance is against India’s national interest as China is courting India’s neighbours, including Bangladesh, with an open wallet. And this is not the first instance of a state coming in the way of national interest.
Political parties in Tamil Nadu, for example, influenced the Manmohan Singh government’s policies on Sri Lanka when the island country was being offered a number of sweetheart deals by China. The Singh government was not just forced to vote against Sri Lanka in the UN Commission on Human Rights but the Tamil Nadu parties effectively vetoed Singh’s plan to travel to Colombo for the November 2013 Commonwealth heads of government meeting.
The Tamil issue in Sri Lanka and Tamil Nadu is a highly emotive one with a complex history involving identity rivalries, but the water-sharing holdout by West Bengal is comparatively easier to resolve. If, as a border state, West Bengal is given more autonomy over cross-border cooperation with Bangladesh, it is likely to generate incentives for Banerjee to make some concessions. The idea is to tie West Bengal’s economy in deep and meaningful ways to Bangladesh’s; the Teesta agreement could then be sold as a quid pro quo for reciprocal benefits. This is exactly the collaborative sub-regionalism Karim talked about—but it does not come at the expense of cooperative federalism. In fact, it comes with an even higher degree of cooperative federalism.
John Kincaid of Lafayette College had coined the term “constituent diplomacy” in 1990 to denote the “international activities of a foreign-policy character undertaken by the constituent governments…and local governments (mostly municipalities) of federal countries and decentralized unitary states, as well as by citizen organizations and non-governmental organizations”. It is also variously referred to as “paradiplomacy” or “sub-national diplomacy”. The practice of constituent diplomacy has been observed across Europe and North America but it has increasingly been adopted in the rest of the world as well. China is a good example.
With an authoritarian political set-up, one would assume China’s foreign policy to be highly centralized. It is indeed. But Chinese provinces also have their own foreign affairs offices (FAOs) and foreign trade and economic cooperation commissions (FTECCs) to deal with international partners. Many Chinese cities have opened overseas offices to attract investments and promote trade. Provincial governments play a big part in setting the agenda of the sub-regional initiatives that China is a part of. The role played by the border province of Yunnan, for instance, has been highly instrumental in the success of the Greater Mekong Subregion (GMS), which includes Cambodia, Laos, Myanmar, Thailand and Vietnam.
It is largely due to provincial autonomy that China has been able to extract much more from its sub-regional initiatives (the GMS, Tumen River Area Development Programme, Central Asia Regional Economic Cooperation, and Pan-Beibu Gulf Economic Cooperation) compared to India’s takeaways from the Mekong-Ganga Cooperation, Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (Bimstec), and the forum on regional cooperation among Bangladesh, China, India and Myanmar (BCIM). The Modi government’s new sub-regional initiative involving Bangladesh, Bhutan and Nepal (BBIN) will meet the same fate if the provinces do not enjoy greater latitude in shaping the agenda of regional cooperation. The geographical expanse of India mandates a role for border states greater than New Delhi in matters of sub-regional cooperation. West Bengal and all the North-Eastern states become crucial in this regard.
While New Delhi needs to adopt a firmer stand on matters of core national interest, it also needs to give the state governments greater freedom to pursue cross-border economic partnerships. It is actually possible to marry cooperative federalism to collaborative sub-regional cooperation.
Should West Bengal be allowed to obstruct the Teesta water-sharing deal?

N.K Singh panel recommends 2.5% fiscal deficit target by FY 2022-23

The NK Singh panel has recommended a debt to GDP ratio of 38.7% for the central government and a fiscal deficit of 2.5% of GDP, both by fiscal year 2022-23

The NK Singh panel to review India’s fiscal discipline rules has recommended a debt to GDP ratio of 38.7% for the central government and a fiscal deficit of 2.5% of GDP, both by fiscal year 2022-23.

The panel has also suggested that there be some flexibility in the deficit targets on both sides — downward when growth is good and upward and it isn’t.
The panel has recommended enacting a new Debt and Fiscal Responsibility Act after repealing the existing Fiscal Responsibility and Budget Management Act , and creating a fiscal council.
In 2016-17, India’s debt to GDP ratio for the central government was 49.4% and fiscal deficit at 3.5% of GDP.
The committee’s report, which was submitted before the union budget presented on 1 February, was made public by the finance ministry on Wednesday.
The proposed three-member fiscal council will prepare multi-year fiscal forecasts for the central and state governments (together called the general government) and provide an independent assessment of the central government’s fiscal performance and compliance with targets set under the new law.
The committee favours a debt to GDP of 60% for the general government by 2022-23, 40% (38.74%) for the central government and 20% for state governments. Within the framework, the committee has recommended adopting fiscal deficit as the key operational target consistent with achieving the medium-term debt ceiling, at 3% of GDP for three years, between 2017-18 and 2019-20.
Revenue deficit to GDP ratio has been envisaged to decline steadily by 0.25 percentage points each year from 2.3% in 2016-17 to 0.8% in 2022-23.
However, to deal with unforeseen events such war, calamities of national proportion, collapse of agriculture activity, far-reaching structural reforms, and sharp decline in real output growth of at least 3 percentage points, the committee has specified deviation in fiscal deficit target not more than 0.5 percentage points. It has noted that Reserve Bank of India governor Urjit Patel had favoured 0.3 percentage points. However, the government has to commit to come back to its stated path of fiscal discipline the following year.
Similar to the escape clause, this buoyancy clause can be invoked by the government, after formal consultations and advice of the fiscal council. “If there is a sharp increase in real output growth of at least 3 percentage points above the average for the previous four quarters, fiscal deficit must fall by at least 0.5 percentage points below the target,” the committee said.

Issues and challenges before higher educational sector in India

• The Standing Committee on Human Resource Development (Chair: Dr. Satyanarayan Jatiya) submitted its report on ‘Issues and challenges before higher educational sector in India’ on February 8, 2017.  The report examined the challenges of higher education in India after studying the higher education institutions in Hyderabad, Chandigarh, Patiala, Thiruvananthapuram, Udaipur, Chennai, Vishakhapatnam, Bhopal and Indore.  The Committee also interacted with public sector banks regarding the education loan facilities being provided to students for higher education. 

• The key observations and recommendations of the Committee are as follows:

• Shortage of resources:  Bulk of the enrolment in higher education is handled by state universities and their affiliated colleges.  However, these state universities receive very small amounts of grants in comparison.  Nearly 65% of the University Grants Commission (UGC) budget is utilised by the central universities and their colleges while state universities and their affiliated colleges get only the remaining 35%.   The Committee recommends that the mobilisation of funds in state universities should be explored through other means such as endowments, contributions from industry, alumni, etc.

• Teacher vacancies:  According to UGC, the total number of sanctioned teaching posts in various Central Universities are 16,699 for professors, 4,731 for associate professors, and 9,585 for assistant professors.  Out of the total sanctioned teaching posts, 5,925 (35%) professor posts, 2,183 (46%) associate professor posts and 2,459 (26%) assistant professor posts are vacant.

• The Committee reasoned that this could be due to two reasons: (i) young students don’t find the teaching profession attractive; or (ii) the recruitment process is long and involves too many procedural formalities.  The recruitment process should start well before a post is vacated.  In addition, to make the profession of teaching more lucrative, faculty should be encouraged to undertake consultancy projects and be provided financial support for start-ups.

• Accountability and performance of teachers:  At present, there is no mechanism for ensuring the accountability and performance of professors in universities and colleges.  This is unlike foreign universities where the performance of college faculty is evaluated by their peers and students.  In this context, a system of performance audit of professors based on the feedback given by their students and colleagues should be set up.  Other inputs like research papers, publications by teachers should be added in the performance audit in due course of time.

• Lack of employable skills:  Lack of employable skills in students of technical education has been observed.  Identification of skill gaps in different sectors and offering courses for enhancing employability in them has been recommended.  Some strategies in this regard can include: (i) Industry Institute Student Training Support, (ii) Industrial Challenge Open Forum, (iii) Long Term Student Industry Placement Scheme, and (iv) Industrial Finishing Schools.

• Accreditation of institutions:  The Committee notes that accreditation of higher educational institutions needs to be at core of the regulatory arrangement in higher education.  Further, quality assurance agencies should guarantee basic minimum standards of technical education to meet the industry demand for quality manpower.  The National Board of Accreditation should act as a catalyst towards quality enhancement and quality assurance of higher technical education.

• Credit rating agencies, reputed industry associations, media houses and professional bodies should be encouraged to carry forward the process of rating of Indian universities and institutions.  A robust rating system will give rise to healthy competition amongst universities and help improve their performance.