1/ From today's The Hindu.
Let me put out a short thread on how this piece got written, and why I think it is important in the ongoing debate on Union-State economic relations. This was a topic I started looking at, first for some fun but later with some academic amusement.
Let me put out a short thread on how this piece got written, and why I think it is important in the ongoing debate on Union-State economic relations. This was a topic I started looking at, first for some fun but later with some academic amusement.
2/ We knew that the Union government was trying to keep an increasing share of its gross tax revenues outside the net proceeds (or the divisible pool) in order to not share them with the States as per Finance Commission recommendations.
3/ But very few of the government numbers on cesses and surcharges were matching. I started adding up each cess and surcharge by myself from the annual receipts budgets. But there was no information anywhere on which item is a cess and which item is a surcharge.
4/ I knocked many government doors but in vain. That was when I decided to go truly traditional, by digging into each budget document of the last 15 years and manually verifying if each item is cess or a surcharge.
5/ And finally I got a time series for 15 years that was very different from all the others published by the government or independent scholars. I will happily claim that you are unlikely to find such a series anywhere else for any recent period.
6/ Till now, most scholars have calculated the quantum of cesses and surcharges by the remainder method. That is, they subtracted the cost of collection of taxes from the net proceeds and assumed that the remainder constituted cesses and surcharges.
7/ But there is no figure on net proceeds published anywhere. So what did they subtract from?
8/ After some more digging, I found out that they had arrived at an estimate of net proceeds by assuming, strangely, that if the "State's share in central taxes" is say X, then it must constitute 32%, 42%, or 41% (respectively, during the 13th, 14th and 15th Finance Commission…
9/ …periods) of say Y, which must be the net proceeds! But then such a method assumes that the Union government is indeed paying 32%, 42% or 41% of the net proceeds to the States in a truthful fashion. How can one be sure? Can't the government be wrong or fudging?
10/ If it were not, why was it not officially publishing the figures for net proceeds anywhere?
It turns out that the doubt was not misplaced.
It turns out that the doubt was not misplaced.
11/ When I followed an additive method of adding up all the cesses and surcharges, it turned out that the government was not just shrinking the net proceeds by increasing cesses and surcharges, but also not paying the States what successive Finance Commissions had asked them to…
12/ …from the net proceeds! This deficit in payments to States, cumulatively over 15 years, was ₹5.61 lakh crores. This is the total amount currently due to the States, thanks to a well designed method of hiding data that should naturally otherwise be in the public domain.
13/ I will leave the rest for you to read at the link below:
thehindu.com
thehindu.com
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