The Centre believes that duty hikes in this year's Budget would be a game changer for local bodies, as they will get more funds. Also, it wants to ride on ‘Effective Revenue Deficit' to check the overall deficit and highlight more capital assets out of its revenue expenditure.
Excerpts from an interview with the Expenditure Secretary, Mr Sumit Bose:
On Subsidy
Last year was not a good year as import prices went up. The subsidy on complex fertilisers has already been reduced by 20 per cent, but this is yet to be done for urea.
Subsidies are not something that you can cut abruptly, especially for food and fertiliser, but we are on course.
Apart from Nutrient-Based Subsidies (NBS), the new investment policy for urea will help. If we start producing more urea, the import bill come down. And if we produce more, international prices will come down, so our subsidy bill will also come down.
On urea price revision
I cannot spell out much, but the decision to shift to NBS is likely to yield results in the coming year. There will be some movement on urea. Let's wait.
On Effective Revenue Deficit
The genesis of effective revenue deficit lies in the Finance Commission's report. The Government gives grants for creation of capital asset to various autonomous institutions, State Governments and local bodies.
The 13th Finance Commission has suggested how accounting norms can be looked into.
Typically, a purist will say that grants that have been given for capital creation cannot be called capital expenditure until and unless the Government owns it.
But there are some international practices that suggest that there may be a case where the Central Government does not own a capital asset, somebody else owns it, and once a transfer is made, it can be treated as capital expenditure.
Take the example of Sarva Shiksha Abhiyan. About 40 per cent goes for construction of school buildings, that 40 per cent spending is creating capital assets. Some would say that teachers are also capital assets, but I am not going into that debate.
Now, under the current practices, that 40 per cent can be classified as revenue expenditure, but under the new norms, we are capturing it as a capital one. This is the effective revenue mechanism.
So, reduction of effective revenue will depend upon three things – creation of capital assets though revenue expenditure, limiting the subsidy, especially to fertiliser and fuel, and merging some social sector schemes for asset creation.
Fund-sharing States
State finance started improving after the 12th Finance Commission.
The debt consolidation and relief facility along with Fiscal Responsibility and Budget Management (FRBM) have really helped the States.
The FRBM clearly set out targets for revenue and capital expenditure.
Now, there are recommendations of the 13th Finance Commission that say that States' shares should go up from 29.5 per cent to 32 per cent.
Also, there is assistance above that, which is a good thing. As a result, the States' growth has gone up.
For local bodies, the 13th Finance Commission has made a huge change.
Earlier, these bodies' grants were on ad hoc basis, but static, and completely delinked with buoyancy in taxes. Now, grants are linked.
The 13th Finance Commission has mimicked the devolution and translated it into grant-in-aid for local bodies.
Local bodies are now benefiting from higher taxes that the Centre collects. So this 2 per cent hike in excise and service tax will not only benefit the States but local bodies, too. It is a game changer.