Call for emphasis on fiscal federation

VADODARA: Chairman of the 12 th Finance Commission and former Governor of Reserve Bank of India Dr C Rangarajan has called upon econometricians to lay special emphasis on the issues pertaining to fiscal federation in the country. Delivering a lecture at the 39th annual conference of Indian Econometrics Society, being held here since Saturday, he said, given the responsibilities of the Centre and the states, it was necessary to study what share of Central resources should go to the states and how much of this should be the responsibility of the finance commission. He said the guiding principles for the distribution of resources among states should be enumerated. The relative weights of tax devolution and grants in the transfer of resources prescribed by the Finance Commission should also be examined, in addition to whether conditional grants could achieve better objectives of equity and efficiency, Rangarajan pointed out. He also asked them to study the sustainable level of fiscal deficit for the Centre as well as for different states and the parameters which would determine such deficits. Besides, there were many specific issues relating to the impact of introduction of VAT (value-added tax) at state level, possibilities of levying taxes on services and the methods for projection of revenues and expenditures, Rangarajan said. A sound fiscal system was a necessary pre-requisite for sustained growth with equity, Rangarajan said, adding that resource transfers must be an integral part of such a system facilitating efficient use of resource, accelerated growth and balance regional development. Econometric methods were statistical methods specifically adapted to the peculiarities of economic phenomena, he said. Econometrics has developed methods to deal with the random component of economic relationships, he added. Transfer of resources from the Centre to federal units is a common phenoenon in all large countries having a federal constitution. This is so because there is always a mismatch between the responsibilities of the federating units and their ability to raise adequate resources, Rangarajan said. Certain resources are best raised only at the Central level - both on grounds of equity and efficiency, thereby necessitating transfer of resources from the Centre to the states in order to correct what is often described as vertical imbalance, he said. Apart from this, the overall resources to be transferred to the states have to be distributed among them once again and the criteria for horizontal distribution are equally important, Rangarajan said. With the constitution of the twelfth finance commission, we are once again drawn into the issues concerning resource transfers between the Centre and the states and among the states, he said. He called for an attempt to maintain the fiscal deficit at a level at which the adverse impact on the system was minimal. Unless the public savings are increased by a large margin, much of the increase in the public sector investment envisaged would have to be met by additional borrowing, Rangarajan observed. An increase in Budget deficit would result in decline in public savings, reducing national saving unless it is fully offset by an increase in private savings, he stated. He called for undertaking studies on examining relationships between interest rates and fiscal deficits. Every state has to address the issue of how to contain fiscal deficit within reasonable limits, he added.

Call for emphasis on fiscal federation

Chairman of the 12th Finance Commission and former Governor of Reserve Bank of India Dr C Rangarajan has called upon econometricians to lay special emphasis on the issues pertaining to fiscal federation in the country.

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